Optimal intertemporal risk allocation applied to insurance pricing
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Publication:6207424
arXiv0711.1143MaRDI QIDQ6207424FDOQ6207424
Authors: Kei Fukuda, Akihiko Inoue, Yumiharu Nakano 
Publication date: 7 November 2007
Abstract: We present a general approach to the pricing of products in finance and insurance in the multi-period setting. It is a combination of the utility indifference pricing and optimal intertemporal risk allocation. We give a characterization of the optimal intertemporal risk allocation by a first order condition. Applying this result to the exponential utility function, we obtain an essentially new type of premium calculation method for a popular type of multi-period insurance contract. This method is simple and can be easily implemented numerically. We see that the results of numerical calculations are well coincident with the risk loading level determined by traditional practices. The results also suggest a possible implied utility approach to insurance pricing.
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