Pricing Industry Loss Warranties in a Lévy-Frailty Framework
Journal
Insurance: Mathematics and Economics
ISSN
0167-6687
Type
journal article
Date Issued
2019-11-01
Author(s)
Abstract
We propose a novel risk-neutral pricing approach for industry loss warranties. In doing so, we explicitly take into account the statistical dependence of the losses on individual policies in the underlying insurance portfolio, caused by the occurrence of a natural catastrophe. Inspired by recent advances in the structured credit literature, we model joint claim events in a Lévy–Frailty framework with a stochastic time change. Event time is driven by rare and large jumps of a compound Poisson subordinator and thus elapses more quickly when a natural catastrophe has struck, leading to a clustering of losses. We estimate the model on historical ILW quotes and obtain encouraging fit statistics.
Language
English
Keywords
Natural Catastrophe Risk
Industry Loss Warranties
Risk-Neutral Valuation
Lévy-Frailty Model
Stochastic Time Change
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
North Holland Publ. Co.
Volume
89
Number
11
Start page
171
End page
181
Subject(s)
Division(s)
Eprints ID
254473
File(s)![Thumbnail Image]()
Name
WP - Beer-Braun-Marugg (2019) - Pricing_industry_loss_warranties_in_a_Lévy–Frailty_framework.pdf
Size
528.37 KB
Format
Adobe PDF
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