Ambiguity and Insurance: Capital Requirements and Premiums

Simon Dietz and Oliver Walker

Journal of Risk & Insurance, 2019, vol. 86, issue 1, 213-235

Abstract: Many insurance contracts are contingent on events such as hurricanes, terrorist attacks, or political upheavals, whose probabilities are ambiguous. This article offers a theory to underpin the large body of empirical evidence showing that higher premiums are charged under ambiguity. We model a (re)insurer that maximizes profit subject to a survival constraint that is sensitive to the range of estimates of the probability of ruin, as well as the insurer's attitude toward this ambiguity. We characterize when one book of insurance is more ambiguous than another and general circumstances in which a more ambiguous book requires at least as large a capital holding. We subsequently derive several explicit formulae for the price of insurance contracts under ambiguity, each of which identifies the extra ambiguity load.

Date: 2019
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://doi.org/10.1111/jori.12208

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:bla:jrinsu:v:86:y:2019:i:1:p:213-235

Ordering information: This journal article can be ordered from
http://www.wiley.com/bw/subs.asp?ref=0022-4367

Access Statistics for this article

Journal of Risk & Insurance is currently edited by Joan T. Schmit

More articles in Journal of Risk & Insurance from The American Risk and Insurance Association Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().