Ambiguity and insurance: capital requirements andpremiums

Simon Dietz and Oliver Walker

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Many insurance contracts are contingent on events such as hurricanes, terrorist attacks or political upheavals, whose probabilities are ambiguous. This paper offers a theory to underpin the large body of empirical evidence showing that higher premiums are charged under ambiguity. We model a (re)insurer who maximises profit subject to a survival constraint that is sensitive to the range of estimates of the probability of ruin, as well as the insurer’s attitude towards this ambiguity. We characterise when one book of insurance is more ambiguous than another and general circumstances in which a more ambiguous book requires at least as large a capital holding. We subsequently derive several explicit formulae for the price of insurance contracts under ambiguity, each of which identifies the extra ambiguity load.

Keywords: ambiguity; ambiguity aversion; ambiguity load; capital requirement; catastrophe risk; insolvency; insurance; more ambiguous; reinsurance; ruin; uncertainty; Solvency II (search for similar items in EconPapers)
JEL-codes: D81 G22 (search for similar items in EconPapers)
Date: 2017-03-23
New Economics Papers: this item is included in nep-cta, nep-ias, nep-mic, nep-rmg and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Published in Journal of Risk and Insurance, 23, March, 2017. ISSN: 0022-4367

Downloads: (external link)
http://eprints.lse.ac.uk/68469/ Open access version. (application/pdf)

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:ehl:lserod:68469

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().