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Optimal premium pricing policy in a competitive insurance market environment

Published online by Cambridge University Press:  21 August 2012

Athanasios A. Pantelous  and
Eudokia Passalidou
Athanasios A. Pantelous*
Affiliation:
Institute for Financial and Actuarial Mathematics (IFAM), Department of Mathematical Sciences, University of Liverpool, UK
Eudokia Passalidou
Affiliation:
Institute for Financial and Actuarial Mathematics (IFAM), Department of Mathematical Sciences, University of Liverpool, UK
*
*Correspondence to: Athanasios A. Pantelous, Institute for Financial and Actuarial Mathematics (IFAM), Department of Mathematical Sciences, University of Liverpool, L69 7ZL, Liverpool, UK. Tel. +44 151 79 45079. E-mail: A.Pantelous@liverpool.ac.uk
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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 drop 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

G22C61IM20IM30Optimal Premium StrategiesCompetitive MarketsVolume of Business, Break-Even Premium RateGreek Automobile Insurance Industry.
Type
Papers
Information
Annals of Actuarial Science , Volume 7 , Issue 2 , September 2013 , pp. 175 - 191
Copyright
Copyright © Institute and Faculty of Actuaries 2012 

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