Memorandum 1695

Approximations for stop-loss reinsurance premiums

R. Reijnen, W. Albers & W.C.M. Kallenberg

Abstract:
Various approximations of stop-loss reinsurance premiums are described in literature. For a wide variety of claim size distributions and retention levels, such approximations are compared in this paper to each other, as well as to a quantitative criterion. For the aggregate claims two models are used, both involving various model parameters. In the first model the claims are simply independent, while a certain dependence structure is assumed in the second model. A relatively simple rule of thumb is formulated for choosing the best approximation for either model. This approximation satisfies the aforementioned criterion. Finally, by comparing the two models, it is demonstrated that a small degree of dependence between the claims already has a substantial effect on the stop-loss premiums. The difference can run up to a factor 500.

Keywords:   Individual model, aggregate claims, stop-loss premium, dependent claims

Mathematics Subject Classification:   62E17, 62P05

View Memorandum 1695.pdf