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A Note on Subadditivity of Zero-Utility Premiums

Published online by Cambridge University Press:  09 August 2013

Michel M. Denuit ,
Louis Eeckhoudt  and
Mario Menegatti
Michel M. Denuit
Affiliation:
Institut de statistique, biostatistique et sciences actuarielles (ISBA), Université Catholique de Louvain, B-1348 Louvain-la-Neuve, Belgium
Louis Eeckhoudt
Affiliation:
IESEG School of Management, LEM, Lille, FranceandCORE, Université Catholique de Louvain, Louvain-la-Neuve, Belgium
Mario Menegatti
Affiliation:
Dipartimento di Economia, Università degli Studi di Parma, Parma, Italy
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Abstract

Many papers in the literature have adopted the expected utility paradigm to analyze insurance decisions. Insurance companies manage policies by growing, by adding independent risks. Even if adding risks generally ultimately decreases the probability of insolvency, the impact on the insurer's expected utility is less clear. Indeed, it is not true that the risk aversion toward the additional loss generated by a new policy included in an insurance portfolio always decreases with the number of contracts already underwritten. The present paper derives conditions under which zero-utility premium principles are subadditive for independent risks. It is shown that subadditivity is the exception rather than the rule: the zero-utility premium principle generates a superadditive risk premium for most common utility functions. For instance, all completely monotonic utility functions generate superadditive zero-utility premiums. The main message of the present paper is thus that the zero-utility premium for a marginal policy is generally not sufficient to guarantee the formation of insurance portfolios without additional capital.

Keywords

Expected utilitycompensating premiumproperness
Type
Research Article
Information
ASTIN Bulletin: The Journal of the IAA , Volume 41 , Issue 1 , May 2011 , pp. 239 - 250
Copyright
Copyright © International Actuarial Association 2011

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