On the Bankruptcy Risk of Insurance Companies

Revue Finance, Vol. 34, N°1, p. 43-72, 2013

24 Pages Posted: 7 Feb 2017

See all articles by Olivier Le Courtois

Olivier Le Courtois

EM Lyon (Ecole de Management de Lyon) - Department of Economics, Finance, Control

Rivo A Randrianarivony

University of Rennes 1; CREM (UMR CNRS 6211)

Date Written: February 7, 2017

Abstract

The fall of AIG is another confirmation that the insurance business is not immune to bankruptcy. Contrary to the actuarial literature which postulates that insurance firms can survive forever, we believe that this is not the case, and that a realistic and business-oriented risk management approach needs to be designed in order to prevent the actual, finite-time, bankruptcy of insurance companies. In this article we model the surplus process of an insurance firm firstly by a stable Lévy process, secondly by a double exponential compound Poisson process. We compute finite-time survival and bankruptcy probabilities under such hypotheses. To achieve this, we make use of the Wiener-Hopf factorization and compute bankruptcy formulas written in terms of inverse Laplace transforms. The Abate and Whitt, and Gaver-Stehfest algorithms are used to obtain numerical estimations.

Keywords: Insurance business, finite and infinite-time bankruptcy

Suggested Citation

Le Courtois, Olivier Arnaud and Randrianarivony, Rivo A, On the Bankruptcy Risk of Insurance Companies (February 7, 2017). Revue Finance, Vol. 34, N°1, p. 43-72, 2013 . Available at SSRN: https://ssrn.com/abstract=2912876

Olivier Arnaud Le Courtois (Contact Author)

EM Lyon (Ecole de Management de Lyon) - Department of Economics, Finance, Control ( email )

23, av. Guy de Collongue
69134 Ecully Cedex
France

Rivo A Randrianarivony

University of Rennes 1 ( email )

11 Rue Jean Macé
Rennes, Rennes 35708
France

CREM (UMR CNRS 6211) ( email )

7, Place Hoche
Rennes, Bretagne 35065
France

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