Pricing ambiguity in catastrophe risk insurance

Simon Dietz and Falk Niehörster

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Ambiguity about the probability of loss is a salient feature of catastrophe risk insurance. Evidence shows that insurers charge higher premiums under ambiguity, but that they rely on simple heuristics to do so, rather than being able to turn to pricing tools that formally link ambiguity with the insurer’s underlying economic objective. In this paper, we apply an α-maxmin model of insurance pricing to two catastrophe model data sets relating to hurricane risk. The pricing model considers an insurer who maximises expected profit, but is sensitive to how ambiguity affects its risk of ruin. We estimate ambiguity loads and show how these depend on the insurer’s attitude to ambiguity, α. We also compare these results with those derived from applying model blending techniques that have recently gained popularity in the actuarial profession, and show that model blending can imply relatively low aversion to ambiguity, possibly ambiguity seeking.

Keywords: ambiguity; catastrophe modelling; insurance; model blending; natural disasters; UKRI fund (search for similar items in EconPapers)
JEL-codes: D81 G22 Q54 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2020-08-27
New Economics Papers: this item is included in nep-agr, nep-env, nep-ias and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations:

Published in Geneva Risk and Insurance Review, 27, August, 2020. ISSN: 1554-964X

Downloads: (external link)
http://eprints.lse.ac.uk/106116/ Open access version. (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:106116

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager (lseresearchonline@lse.ac.uk).