Advantages of Accounting for Stochasticity in the Premium Process

Yang Miao and Kristina P. Sendova ()
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Yang Miao: Department of Statistical and Actuarial Sciences, Western University, London, ON N6A 3K7, Canada
Kristina P. Sendova: Department of Statistical and Actuarial Sciences, Western University, London, ON N6A 3K7, Canada

Risks, 2024, vol. 12, issue 10, 1-25

Abstract: In this paper, we study a risk model with stochastic premium income and its impact on solvency risk management. It is assumed that both the premium arrival process and the claim arrival process are modelled by homogeneous Poisson processes, and that the premium amounts are modelled by independent and identically distributed random variables. While this model has been studied in the existing literature and certain explicit results are known under more restrictive assumptions, these results are relatively difficult to apply in practice. In this paper, we investigate the factors that differentiate this model and the classical risk model. After reviewing various known results of this model, we derive a simulation approach for obtaining the probability of ultimate ruin based on importance sampling, which does not require specific distributions for the premium and the claim. We demonstrate this approach first with examples where the distribution of the sampling random variable can be identified. We then provide additional examples where we use the fast Fourier transform to obtain an approximation of the sampling random variable. The simulated results are compared with the known results for the probability of ruin. Using the simulation approach, we apply this model to a real-life auto-insurance data set. Differences with the classical model are then discussed. Finally, we comment on the suitability and impact of using this model in the context of solvency risk management.

Keywords: risk model; Poisson process; importance sampling; fast Fourier transform (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2024
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