Fuzzy set theory is a recently developed field of mathematics, that introduces sets of objects whose boundaries are not sharply defined. Whereas in ordinary Boolean algebra an element is either contained or not contained in a given set, in fuzzy set theory the transition between membership and non-membership is gradual. The theory aims at modelizing situations described in vague or imprecise terms, or situations that are too complex or ill-defined to be analysed by conventional methods. This paper aims at presenting the basic concepts of the theory in an insurance framework. First the basic definitions of fuzzy logic are presented, and applied to provide a flexible definition of a “preferred policyholder” in life insurance. Next, fuzzy decision-making procedures are illustrated by a reinsurance application, and the theory of fuzzy numbers is extended to define fuzzy insurance premiums.
