Canceling of Insurance Contracts

Tilburg University, CentER Working Paper No. 1999-60

Posted: 15 Mar 2000

See all articles by R.C.M. Brekelmans

R.C.M. Brekelmans

Tilburg University - Tilburg University School of Economics and Management

Anja De Waegenaere

Tilburg University - Department of Econometrics & OR, Netspar, and CentER

Date Written: 1999

Abstract

In this paper we consider an insurer who has incomplete information about the claim frequency of the risk process. He therefore calculates the premium on the basis of a prior distribution for the claim frequency. Future information might then reveal that it is no longer optimal for the insurer to continue to offer the insurance under the current conditions. We consider a model where, at certain points in time, the insurer can decide to cancel the insurance, possibly at the expense of canceling costs. The model is applicable to long-period, client tailored insurance contracts as well as insurance offered to large groups of insureds on a single period basis. We derive the optimal canceling policy and analyze the in uence of the different model parameters on the expected lifetime of the insurance, the insurer's expected surplus, and the safety loading.

Keywords: risk, insurance, dynamic programming

JEL Classification: C39

Suggested Citation

Brekelmans, R.C.M. and De Waegenaere, Anja M.B., Canceling of Insurance Contracts (1999). Tilburg University, CentER Working Paper No. 1999-60. Available at SSRN: https://ssrn.com/abstract=199739

R.C.M. Brekelmans

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
B 1029
5000 LE Tilburg
Netherlands
+31 13 466 8234 (Phone)

Anja M.B. De Waegenaere (Contact Author)

Tilburg University - Department of Econometrics & OR, Netspar, and CentER ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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