Optimal Premium Pricing Policy in a Competitive Insurance Market Environment

Annals of Actuarial Science, Volume 7, Issue 2, pp. 175-191, September 2013, DOI: 10.1017/S1748499512000152

27 Pages Posted: 16 Sep 2011 Last revised: 18 Jul 2016

See all articles by Athanasios A. Pantelous

Athanasios A. Pantelous

Monash University - Department of Econometrics & Business Statistics

Eudokia Passalidou

University of Liverpool - Institute of Financial and Actuarial Mathematics

Date Written: September 16, 2011

Abstract

In this paper, we propose a model for the optimal premium pricing policy of an insurance company into a competitive environment using Dynamic Programming into a stochastic, discrete-time framework when the company is expected to lose part of the market. In our approach, the volume of business which is related to the past year experience, the average premium of the market, the company’s premium which is a control function and a linear stochastic disturbance have been considered. Consequently, maximizing the total expected linear discounted utility of the wealth over a finite time horizon, the optimal premium strategy is defined analytically and endogenously. Finally, considering two different strategies for the average premium of the market, the optimal premium policy for a company with an expected decreasing volume of business is derived and fully investigated. The results of this paper are further evaluated by using data from the Greek Automobile Insurance Industry.

Keywords: Optimal Premium Strategies, Competitive Markets, Volume of Business, Break-Even Premium Rate, Greek Automobile Insurance Industry

JEL Classification: G22, C61

Suggested Citation

Pantelous, Athanasios A. and Passalidou, Eudokia, Optimal Premium Pricing Policy in a Competitive Insurance Market Environment (September 16, 2011). Annals of Actuarial Science, Volume 7, Issue 2, pp. 175-191, September 2013, DOI: 10.1017/S1748499512000152, Available at SSRN: https://ssrn.com/abstract=1928584 or http://dx.doi.org/10.2139/ssrn.1928584

Athanasios A. Pantelous (Contact Author)

Monash University - Department of Econometrics & Business Statistics ( email )

Wellington Road
Clayton, Victoria 3168
Australia

Eudokia Passalidou

University of Liverpool - Institute of Financial and Actuarial Mathematics ( email )

Peach Street
Liverpool, L697ZL
United Kingdom

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