Pricing insurance contracts with an existing portfolio as background risk

We develop and investigate a premium principle that explicitly takes into account the impact of a new risk on some insurer's existing portfolio. Specifically, we propose the notion of an indifference premium for a new risk conditioned on an existing portfolio acting as background risk. The resulting premium rule, which in our case depends on the joint distribution of the new risk and the existing portfolio, is analyzed in detail with respect to its mathematical properties. In order to underline the differences between our approach and the literature on law-invariant premium rules, special attention is given to the indifference premium behaviour with respect to some well-known dependence concepts. Axiomatic and continuity properties of the proposed indifference premium rule are also investigated. To demonstrate the practical relevance of our approach, we consider a portfolio of exchangeable risks and investigate the role of the portfolio's dimension on the price of a risk to be added. This illustrates the (limits of) diversification benefits under the flexible exchangeability assumption on the joint distribution of a sequence of risks.

Authors

Institutions

Publication Details

Journal
Insurance Mathematics and Economics
Published
2025-03-07
DOI
https://doi.org/10.1016/j.insmatheco.2025.03.001
Primary Topic
Insurance, Mortality, Demography, Risk Management
Type
article
Field-Weighted Citation Impact
0.00
Controls
|||
ALL TIME
JAN
FEB
MAR
APR
MAY
JUN
JUL
AUG
SEP
OCT
article

Pricing insurance contracts with an existing portfolio as background risk

Corrado De Vecchi, Matthias Scherer
Insurance Mathematics and Economics
Insurance, Mortality, Demography, Risk Management
article

Pricing insurance contracts with an existing portfolio as background risk

Corrado De Vecchi, Matthias Scherer
article en

Abstract

We develop and investigate a premium principle that explicitly takes into account the impact of a new risk on some insurer's existing portfolio. Specifically, we propose the notion of an indifference premium for a new risk conditioned on an existing portfolio acting as background risk. The resulting premium rule, which in our case depends on the joint distribution of the new risk and the existing portfolio, is analyzed in detail with respect to its mathematical properties. In order to underline the differences between our approach and the literature on law-invariant premium rules, special attention is given to the indifference premium behaviour with respect to some well-known dependence concepts. Axiomatic and continuity properties of the proposed indifference premium rule are also investigated. To demonstrate the practical relevance of our approach, we consider a portfolio of exchangeable risks and investigate the role of the portfolio's dimension on the price of a risk to be added. This illustrates the (limits of) diversification benefits under the flexible exchangeability assumption on the joint distribution of a sequence of risks.

Insurance Mathematics and EconomicsVol. 122
University of Verona (IT), Technical University of Munich (DE)
Decent work and economic growth
Openalex Percentile: Top 93%
Insurance, Mortality, Demography, Risk Management
AI Navigator

Ask Laika to Summarize, Analyze, and Connect papers live on the map.

Summarize Papers & Methodologies

Extract key findings, datasets, and comparative methods across publications.

Benchmark Rankings & Visual Analytics

Rank top research institutions, authors, funders, topics, and journals by Field-Weighted Citation Impact (FWCI) and paper volume with instant charts.

Connect Distant Disciplines

Bridge topological clusters on the map to find hidden collaborative intersections.