Pricing industry loss warranties in a Lévy–Frailty framework

Simone Beer, Alexander Braun and Andrin Marugg

Insurance: Mathematics and Economics, 2019, vol. 89, issue C, 171-181

Abstract: We propose a novel risk-neutral pricing approach for industry loss warranties. In doing so, we explicitly take into account the statistical dependence of the losses on individual policies in the underlying insurance portfolio, caused by the occurrence of a natural catastrophe. Inspired by recent advances in the structured credit literature, we model joint claim events in a Lévy–Frailty framework with a stochastic time change. Event time is driven by rare and large jumps of a compound Poisson subordinator and thus elapses more quickly when a natural catastrophe has struck, leading to a clustering of losses. We estimate the model on historical ILW quotes and obtain encouraging fit statistics.

Keywords: Natural catastrophe risk; Industry loss warranties; Risk-neutral valuation; Lévy–Frailty model; Stochastic time change (search for similar items in EconPapers)
JEL-codes: G13 G22 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:89:y:2019:i:c:p:171-181

DOI: 10.1016/j.insmatheco.2019.09.008

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