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Ruin probabilities and optimal capital allocation for heterogeneous life annuity portfolios

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  • Esther Frostig
  • Michel Denuit

Abstract

A large part of the actuarial literature is devoted to the derivation of ruin probabilities in various non-life insurance risk models. On the contrary, very few papers deal with ruin probabilities for life insurance portfolios. The difficulties arise from the dependence and non-stationarity of the annual payments made by the insurance company. This paper shows that the ruin probability in case of life annuity portfolios can be computed from algorithms derived by De Pril (1989) and Dhaene & Vandebroek (1995). Approximations for ruin probabilities are discussed. The present article complements the works of Frostig et al. (2003) who considered whole life, endowment, and temporary assurances, and of Denuit & Frostig (2008) who considered homogeneous life annuities portfolios. Here, heterogeneous portfolios (with respect to age and/or face amounts) are studied. Particular attention is paid to the capital allocation problem. The total amount of reserve is shared among the risk classes in order to minimize the ruin probability. It is then fair to charge a higher margin to the risk classes requiring more capital.

Suggested Citation

  • Esther Frostig & Michel Denuit, 2009. "Ruin probabilities and optimal capital allocation for heterogeneous life annuity portfolios," Scandinavian Actuarial Journal, Taylor & Francis Journals, vol. 2009(4), pages 295-305.
    • Handle: RePEc:taf:sactxx:v:2009:y:2009:i:4:p:295-305
    DOI: 10.1080/03461230902753507
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