Min-Ming Wen
Abstract
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.
Key words and phrases: co-movements, power utility function, market based pricing model
Corresponding Author:
Min-Ming Wen
Department of Quantitative Finance
101, Section
Hsinchu,
E-mail: mmwen@mx.nthu.edu.tw
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