Open Access. Powered by Scholars. Published by Universities.®
Articles 1 - 1 of 1
Full-Text Articles in Insurance
Pricing Insurance Policies With A Distribution-Free Financial Pricing Model, Min-Ming Wen
Pricing Insurance Policies With A Distribution-Free Financial Pricing Model, Min-Ming Wen
Journal of Actuarial Practice (1993-2006)
The highly skewed and heavy tailed distributions used to model insurance losses (claims) raise a concern about the validity of the applications of the capital asset pricing model (CAPM) to insurance pricing when market risks are essential. This paper provides an alternative pricing model, called the Rubinstein-Leland model, which can be used to price insurance contracts. The Rubinstein-Leland model has a distribution-free feature that can fully capture the asymmetry embedded in insurance losses. Thus, this model is better able to derive fair prices for insurance policies than is the CAPM.