Abstract
In this chapter the several dimensions of supply of insurance coverage are expounded. A first dimension is the pricing of insurance products. The objective is to calculate a minimum premium at which a single insurance product breaks even (noting that the market may not accept it). Section 6.1 introduces the reader to traditional premium calculation, where pricing depends upon the characteristics of the loss distribution and an exogenously given ruin probability (the probability of solvency, respectively), applying elements of probability theory. On the other hand, for the determination of the market price of an insurance product, the alternatives which are available to investors and insurance buyers (IB) on the capital market must be evaluated. Accordingly, in Sect. 6.2 elements of capital market theory are applied to derive the premium the insurance company (IC) must obtain to be sufficiently attractive to investors and can charge while still attracting IB, respectively.
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Notes
- 1.
In this chapter, Î denotes the premium because the symbol P is used for the put option.
- 2.
As an example, Goovaerts and Laeven (2008, 121) cite a driver who causes a Poisson number X of accidents in one year, where the parameter λ [denoted by π in equation (6.5) of Sect. 6.1.1.1)] is drawn from the distribution of the structure variable Λ. The number of accidents varies because of the Poisson deviation from the expectation λ, and because of the variation of the structure distribution. In case of iterativity, if we set premiums for both sources of variation one after another, we get the same premium as when we determine the premium for x directly.
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© 2012 Springer-Verlag Berlin Heidelberg
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Zweifel, P., Eisen, R. (2012). The Supply of Insurance. In: Insurance Economics. Springer Texts in Business and Economics. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-20548-4_6
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DOI: https://doi.org/10.1007/978-3-642-20548-4_6
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