New fuzzy insurance pricing method for giga-investment project insurance

Pasi Luukka and Mikael Collan

Insurance: Mathematics and Economics, 2015, vol. 65, issue C, 22-29

Abstract: Large industrial investments, also called giga-investments, are a risky business and to attract financing they often require project insurance to mitigate risks. Giga-investments have long economic lives and can often steer their markets: information available is non-stochastic, normative, and often imprecise. The type of uncertainty that faces giga-investments is parametric and structural. We use possibility theory as a mathematical framework for modeling giga-investment profitability and based on the profitability models derive a new and intuitive four-step procedure for pricing giga-investment project insurance that is based on creating a pay-out distribution for the giga-investment project insurance contract. We present a set of numerical illustrations of insurance pricing with the new method.

Keywords: Insurance pricing; Project insurance; Possibility distribution; Pay-off method; Pay-out distribution; Parametric uncertainty; Structural uncertainty (search for similar items in EconPapers)
JEL-codes: G22 G31 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:65:y:2015:i:c:p:22-29

DOI: 10.1016/j.insmatheco.2015.08.002

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