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Dissertation
We have a technical premium, what’s next? A pricing strategy for non-life insurance taking into account competition and lapses
Authors: --- --- ---
Year: 2021 Publisher: Leuven KU Leuven. Faculteit Economie en Bedrijfswetenschappen

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Abstract

A non-life insurer calculates technical premiums as the expected amount of money that needs to be charged in order to cover the expected claim costs. While the computation of the technical premium is quite well understood, the computation of the actual market premiums will differ significantly from the technical premiums computed due to a number of extra premium elements. The additional premium elements with the most impact in the final premium offered to the insured are the cost factor, which includes all the overhead costs that the insurer will likely incur during the following year, and the loading factor, that represents the profit that the insurer expects to make on each individual contract. In this thesis, we develop a new methodology for the computation of the optimal market premium of an insurer, taking both the cost and loading factor into account. In order to do so, we develop a new model of an insurance market, based on the insights of the previous papers written on the subject, in order to model the impact of competition on the optimal behavior of the insurer. We then use this insurance model in order to formulate a stochastic optimization problem, where we maximize the expected profit of the insurer while satisfying optimization constraints. Finally, we validate the performance of our algorithm by fitting our model on the Motor Third Party Liability (TPL) Belgian insurance market and conclude this thesis by providing numerical results showing the optimal pricing strategy of a typical Belgian insurer.

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