Insurance pricing in an equilibrium model

Frank Y. Feng, Xudong Zeng and Guanxia Zhu

Scandinavian Actuarial Journal, 2023, vol. 2023, issue 8, 834-852

Abstract: We develop a dynamic equilibrium model of insurance pricing in a competitive market consisting of heterogeneous insurance companies. The insurers have different beliefs on expected loss rate of an underlying risk process and the belief divergences are stochastic. The insurers select optimal insurance market shares to maximize their individual utilities. The equilibrium insurance price is formulated when the insurance market is cleared. We provide a general equilibrium framework with a continuum of insurers in the market and then solve for the equilibrium insurance price explicitly in the case of N insurers. We find that the stochastic heterogeneity brings extra volatility to insurance price and makes it dynamic. The mean-reverting divergences of insurers may explain cycles of insurance business documented by empirical studies. Compared to the previous literature of optimal insurance, this paper introduces an asset pricing framework of general equilibrium to the research of insurance pricing.

Date: 2023
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/03461238.2022.2161412 (text/html)
Access to full text is restricted to subscribers.

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:taf:sactxx:v:2023:y:2023:i:8:p:834-852

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/sact20

DOI: 10.1080/03461238.2022.2161412

Access Statistics for this article

Scandinavian Actuarial Journal is currently edited by Boualem Djehiche

More articles in Scandinavian Actuarial Journal from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().