Approximation of ruin probabilities via Erlangized scale mixtures

DOI10.1016/J.INSMATHECO.2017.12.005zbMATH Open1398.91351arXiv1705.09405OpenAlexW2618723292MaRDI QIDQ1697232FDOQ1697232

Wangyue Xie, Hui Yao, L. Rojas-Nandayapa, Oscar Peralta

Publication date: 15 February 2018

Published in: Insurance Mathematics \& Economics (Search for Journal in Brave)

Abstract: In this paper, we extend an existing scheme for numerically calculating the probability of ruin of a classical Cram'er--Lundberg reserve process having absolutely continuous but otherwise general claim size distributions. We employ a dense class of distributions that we denominate Erlangized scale mixtures (ESM) and correspond to nonnegative and absolutely continuous distributions which can be written as a Mellin--Stieltjes convolution $PistarG$ of a nonnegative distribution $Pi$ with an Erlang distribution $G$. A distinctive feature of such a class is that it contains heavy-tailed distributions. We suggest a simple methodology for constructing a sequence of distributions having the form $PistarG$ to approximate the integrated tail distribution of the claim sizes. Then we adapt a recent result which delivers an explicit expression for the probability of ruin in the case that the claim size distribution is modelled as an Erlangized scale mixture. We provide simplified expressions for the approximation of the probability of ruin and construct explicit bounds for the error of approximation. We complement our results with a classical example where the claim sizes are heavy-tailed.

Full work available at URL: https://arxiv.org/abs/1705.09405

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zbMATH Keywords

ruin probabilityheavy-tailedscale mixturesErlangphase-typeinfinite mixtures

Mathematics Subject Classification ID

Numerical methods (including Monte Carlo methods) (91G60) Numerical methods for ill-posed problems for integral equations (65R30)

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Cited In (6)

• Ruin probabilities as functions of the roots of a polynomial
• “On the Class of Erlang Mixtures with Risk Theoretic Applications,” Gordon E. Willmot and Jae-Kyung Woo, April 2007
• Authors’ Reply: On the Class of Erlang Mixtures with Risk Theoretic Applications - Discussion by David C. M. Dickson; Howard R. Waters
• Ruin under light-tailed or moderately heavy-tailed insurance risks interplayed with financial risks
• Approximation of the ruin probability using the scaled Laplace transform inversion
• Hamilton-Jacobi-Bellman-Isaacs equation for rational inattention in the long-run management of river environments under uncertainty

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