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# Introduction and Background

## Statement of the Problem

Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

## Ruin Probability on Premium Pricing using Pareto

Distributed Claims on Policies with Benefit Limit
Ayrnand Mitchell B. Kabiri
University of the Philippines Los Baos

December 4, 2014

AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

Preliminaries

Objectives

Methodology

Reference
AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

Preliminaries

Objectives

Methodology

Reference
AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

## An Insurance policy contract is an agreement between the insurer

(insurance company) and an insured (policyholder), wherein for a
given amount of premium paid by the insured, the insurer would
provide a benefit to the insured in the time that a loss would occur.

AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

## Premium is the specific amount paid by the insured to the insurer,

as a compensation for the benefit he/she might get at the time that
a loss will occur.

AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

## Premium is the specific amount paid by the insured to the insurer,

as a compensation for the benefit he/she might get at the time that
a loss will occur.
Loss is the amount of money corresponding to the cost of damage
of a property.

AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

## Premium is the specific amount paid by the insured to the insurer,

as a compensation for the benefit he/she might get at the time that
a loss will occur.
Loss is the amount of money corresponding to the cost of damage
of a property. Claims is the total amount of money an insured may
get when he/she incurred a loss.

AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

## According to Constantinescu [3], a basic assumption used in the

insurance industry was that the insurer will fix a premium price and
will provide an initial wealth at the time an insurance policy starts
and the insurance company will not take further actions to make
the business going until the end of the term of the policy. It means
that the insurer will only rely on their initial wealth and the
premiums they have collected to cover for the losses that the
insured will incur at a certain time. If there will be lots of loss
reported, and the total loss is greater than the wealth and
premiums collected at that time, then the insurance company may
become insolvent or ruined.
AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

## Insolvency describes a company that can no longer meet its

financial obligations.

AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

## Insolvency describes a company that can no longer meet its

financial obligations.
Ruin happens when the wealth of the insurance company
becomes less than zero.

AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

## Insolvency describes a company that can no longer meet its

financial obligations.
Ruin happens when the wealth of the insurance company
becomes less than zero.Ruin probability is the probability of an
insurer to be ruined at a certain time.

AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

## Insolvency describes a company that can no longer meet its

financial obligations.
Ruin happens when the wealth of the insurance company
becomes less than zero.Ruin probability is the probability of an
insurer to be ruined at a certain time.
One way of minimizing the ruin probability is by limiting the policy
contracts.

AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

## Insolvency describes a company that can no longer meet its

financial obligations.
Ruin happens when the wealth of the insurance company
becomes less than zero.Ruin probability is the probability of an
insurer to be ruined at a certain time.
One way of minimizing the ruin probability is by limiting the policy
contracts.One of these limits is the Benefit limit. Benefit limit is an
upper boundary on how much an insurance will provide for any
loss.

AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

Preliminaries

Objectives

Methodology

Reference
AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

## To find the premium price of an insurance policy with benefit limit

using a Pareto distributed claim sizes such that the ruin probability
does not exceed the given level of tolerance.

AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

Preliminaries

Objectives

Methodology

Reference
AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

Preliminaries
Ruin Theory
We consider the collective risk process

U (t, ) = + pt S(t)

AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

Preliminaries
Ruin Theory
We consider the collective risk process

U (t, ) = + pt S(t)
where U (t, ) is the insurers surplus at time t, is the initial
N (t)

## surplus, p is the premium per unit time and S(t) =

Xi as the

i =1

ith claim and N (t) as the number of claims on the interval (0, t]
and it follows a poisson process.
AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

Ruin Theory
Suppose that N (t) = t. This assumption will only be valid if we
consider a group insurance and Xi be the total amount of claims
t

Xi where each

i =1

## Xi are independent and identically distributed (i.i.d.) claim size

random variable. With this, it follows that

AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

Ruin Theory
Suppose that N (t) = t. This assumption will only be valid if we
consider a group insurance and Xi be the total amount of claims
t

Xi where each

i =1

## Xi are independent and identically distributed (i.i.d.) claim size

random variable. With this, it follows that
t

U ( T, ) = + pt Xi .
i =1

AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

Definition
The time of ruin is defined as the event when the value of the
surplus is less than zero. Thus, it can be defined as

( ) = inf{t|U ( T, ) < 0}
where ( ) is the time of ruin with initial surplus .

AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

Definition
Infinite-time ruin probability at time t with initial surplus is given
by

(, T ) = P( ( ) < ).

AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

Definition
Infinite-time ruin probability at time t with initial surplus is given
by

(, T ) = P( ( ) < ).
Definition
Finite-time ruin probability at time t with initial surplus is given by

(, T ) = P( ( ) < T ).

AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

Benefit Limit
Definition
Benefit limit is defined as the amount given to the insured if the
loss is greater than the limit. Otherwise, the original claim will be
given to the insured.

AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

Pareto Distribution
Definition
A random variable X is said to follow the Pareto distribution with
parameters > 0 and > 0 if its distribution function F is given by

F(x) =
+x

+x

AM Kabiri


,x 0

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

Preliminaries

Objectives

Methodology

Reference
AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

Objectives
This research aims to:

AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

Objectives
This research aims to:
1

## Find a closed-form expression that will define the ruin probability of

an insurer with a policy contract that includes benefit limit with
Pareto distributed claims.

AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

Objectives
This research aims to:
1

## Find a closed-form expression that will define the ruin probability of

an insurer with a policy contract that includes benefit limit with
Pareto distributed claims.

## Use a computer program in solving the premium price of the

insurance policy, given the initial capital of the insurer, limit value of
the insurance policy and the ruin probability using the closed-form
expression.

AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

Objectives
This research aims to:
1

## Find a closed-form expression that will define the ruin probability of

an insurer with a policy contract that includes benefit limit with
Pareto distributed claims.

## Use a computer program in solving the premium price of the

insurance policy, given the initial capital of the insurer, limit value of
the insurance policy and the ruin probability using the closed-form
expression.

Examine the behavior of the policy with benefit limit and the ruin
probability when the premium prices varies.
AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

Preliminaries

Objectives

Methodology

Reference
AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

## Significance of the Study

The results of this study can be used by insurance companies as a
basis for calculating the premium prices of their insurance policies
with benefit limit. Premium prices can be calculated by setting the
desired ruin probabilities and the limit for the benefit limit.They can
base the calculation of the premium prices on the ruin probability
of their insurance company. Thus, this will be beneficial for insurers
for determining the premium price with a known ruin probability for
any time.

AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

Preliminaries

Objectives

Methodology

Reference
AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

## Review of Related Literature

The paper of Felix, Maranan, and Ruanto [5] calculated the premium
prices of an insurance policy with deductible and with benefit limit using
exponentially distributed claims. They derived a general expression for
computing the premium prices of an insurance policy with deductible and
the general expression for insurance policy with benefit limit. They run a
simulation using a computer program, and observed the behavior of the
premium prices in relation to the ruin probability, deductible, and benefit
limit. They observed that premium prices increases as the ruin probability
decreases and they also observed that premium prices increases as the
deductible decreases or as the limit increases.
AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

## Review of Related Literature

In the paper of Bladt, Nielsen, and Samorodnitsky [2], they calculated the
ruin probabilities with a dense class of heavy tailed distributions. One of
the heavy tailed distributions they used is the Pareto distributions. They
formed an expression for calculating ruin probability with Pareto
distribution. They compared the approximate values they calculated
using their expression to the values of ruin probability found in the paper
of Ramsay. They found out that the approximate results are reasonably
close to the true value. And the largest deviation is found on moderately
large values of initial reserves.
AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

Preliminaries

Objectives

Methodology

Reference
AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

Methodology
To find a closed-form expression that will define the ruin probability
of an insurer with a policy contract that includes benefit limit with
Pareto distributed claims, we will

AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

Methodology
To find a closed-form expression that will define the ruin probability
of an insurer with a policy contract that includes benefit limit with
Pareto distributed claims, we will
use the finite-time ruin probability

(, T ) = P( ( ) < T ).

AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

Methodology
To find a closed-form expression that will define the ruin probability
of an insurer with a policy contract that includes benefit limit with
Pareto distributed claims, we will
use the finite-time ruin probability

(, T ) = P( ( ) < T ).
assume that the loss amount is Pareto distributed

AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

Methodology
To find a closed-form expression that will define the ruin probability
of an insurer with a policy contract that includes benefit limit with
Pareto distributed claims, we will
use the finite-time ruin probability

(, T ) = P( ( ) < T ).
assume that the loss amount is Pareto distributed
construct a density function for the policy with benefit limit

AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

Methodology
To find a closed-form expression that will define the ruin probability
of an insurer with a policy contract that includes benefit limit with
Pareto distributed claims, we will
use the finite-time ruin probability

(, T ) = P( ( ) < T ).
assume that the loss amount is Pareto distributed
construct a density function for the policy with benefit limit
find the ruin probability at times 1,2,3,4, and 5.
AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

## Create a program in scilab for computing the premium prices of a

policy with benefit limit using the expression we found in computing
the ruin probability with Pareto distributed losses on policy with
benefit limit.

AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

## Create a program in scilab for computing the premium prices of a

policy with benefit limit using the expression we found in computing
the ruin probability with Pareto distributed losses on policy with
benefit limit.
Calculate the premium prices for different ruin probability and
benefit limit using the created scilab program. We will vary the
levels of ruin probabilities and limit.

AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

## Create a program in scilab for computing the premium prices of a

policy with benefit limit using the expression we found in computing
the ruin probability with Pareto distributed losses on policy with
benefit limit.
Calculate the premium prices for different ruin probability and
benefit limit using the created scilab program. We will vary the
levels of ruin probabilities and limit.
Examine the behavior of the calculated premium prices with
different levels of ruin probability and benefit limits.
AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

Preliminaries

Objectives

Methodology

Reference
AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

## J. f. Anderson and R. Brown. Risk and Insurance. Study Note, 2005

M. Bladt, etal. Calculation of Ruin Probabilities for a Dense Class of
Heavy Tailed Distribution. n.d.
C.Constantinescu, V. M. D., and R. Norberg. Risk process with
dependence and premium adjusted to solvensy targets. European
Actuarial Journal, 2010.
M. Denuit, J. Dhaene, M. Goovaerts, and R. Kaas, Modern Actuarial
Risk Theory , 2nd Edition, Germany. Springer, 2009.
E. F. Felix, S. C. Maranan, and J. J. Ruanto. Ruin probability on
Premium Pricing Using Exponentially Distributed Claims with Policy
Deductible and with Benefit Limit. University of the Philippines Los
Baos. 2013.
AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

edition, 2007.

AM Kabiri

## Introduction and Background

Statement of the Problem
Preliminaries
Objectives
Significance of the Study
Review of Related Literature
Methodology
Reference

AM Kabiri