The Power Principle and Tail-fatness Uncertainty
journal contributionposted on 03.11.2017 by Gay, Roger
Any type of content formally published in an academic journal, usually following a peer-review process.
When insurance claims are governed by fat-tailed distributions, gross uncertainty about the value of the tail-fatness index is virtually inescapable. In this paper a new premium principle (the power principle) analogous to the exponential principle for thin-tailed claims, is discussed. Pareto premiums determined under the principle have a transparent ratio structure, cater convincingly for uncertainty in the tail-fatness index, and are applicable in passage to the extremal limit, to all fat-tailed distributions in the domain of attraction of the (Frechet) extreme-value distribution. Cover can be provided for part claims if existence of the claims mean is in doubt. Stop-loss premiums are also discussed. Mathematical requirements are very modest.