Rate of convergence of the probability of ruin in the Cramér-Lundberg model to its diffusion approximation

DOI10.1016/J.INSMATHECO.2020.06.003MaRDI QIDQ784454zbMATHOpenAlexFDO

Authors Asaf Cohen, Virginia R. Young

Publication date 3 August 2020

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

Full work available at URL https://arxiv.org/abs/1902.00706

zbMATH Keywords

diffusion approximationinvestment analysisapproximation errorprobability of ruinCramér-Lundberg risk process

Mathematics Subject Classification ID

Actuarial mathematics (91G05) Diffusion processes (60J60) Integro-ordinary differential equations (45J05)

Abstract: We analyze the probability of ruin for the {it scaled} classical Cram'er-Lundberg (CL) risk process and the corresponding diffusion approximation. The scaling, introduced by Iglehart cite{I1969} to the actuarial literature, amounts to multiplying the Poisson rate $la$ by $n$, dividing the claim severity by $sqrtn$, and adjusting the premium rate so that net premium income remains constant. %Therefore, we think of the associated diffusion approximation as being "asymptotic for large values of $la$." We are the first to use a comparison method to prove convergence of the probability of ruin for the scaled CL process and to derive the rate of convergence. Specifically, we prove a comparison lemma for the corresponding integro-differential equation and use this comparison lemma to prove that the probability of ruin for the scaled CL process converges to the probability of ruin for the limiting diffusion process. Moreover, we show that the rate of convergence for the ruin probability is of order $$, and we show that the convergence is {it uniform} with respect to the surplus. To the best of our knowledge, this is the first rate of convergence achieved for these ruin probabilities, and we show that it is the tightest one in the general case. For the case of exponentially-distributed claims, we are able to improve the approximation arising from the diffusion, attaining a uniform $$ rate of convergence for arbitrary $kinN$. We also include two examples that illustrate our results.

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Cited in

(12)

• Cramér-Lundberg approximations for ruin probabilities of risk processes perturbed by diffusion
• The de Vylder-Goovaerts conjecture holds within the diffusion limit
• Optimal investment in defined contribution pension schemes with forward utility preferences
• Diffusive limit approximation of pure-jump optimal stochastic control problems
• Coupling and explicit rate of convergence in Cramér-Lundberg approximation for reinsurance risk processes
• Asymptotic analysis of a Stackelberg differential game for insurance under model ambiguity
• Optimal Ratcheting of Dividends in a Brownian Risk Model
• Discounted probability of exponential Parisian ruin: diffusion approximation
• Optimal Reinsurance to Minimize the Probability of Drawdown under the Mean-Variance Premium Principle: Asymptotic Analysis
• Optimal dividend problem: asymptotic analysis
• Approximating the classical risk process by stable Lévy motion
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