The tradeoff insurance premium as a two-sided generalisation of the distortion premium

Weihao Choo and Piet de Jong

Insurance: Mathematics and Economics, 2015, vol. 65, issue C, 238-246

Abstract: This paper introduces and analyzes the “tradeoff premium”, generalising the loss aversion reserve, distortion premium, spectral risk, and their duals. The tradeoff premium is a weighted average loss where weights increase as loss outcomes deviate from a subjective “loss appetite”, rather than from zero. The U-shaped weights replicate subjective probability adjustment in cumulative prospect theory, and minimise pricing error in a competitive market where overpricing and underpricing are both undesired.

Keywords: Weighted premium; Loss aversion reserve; Distortion premium; Spectral risk; Two-sided; Loss appetite (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:238-246

DOI: 10.1016/j.insmatheco.2015.09.014

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