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Conditional Tail Expectation and Premium Calculation*

Published online by Cambridge University Press:  09 August 2013

Beatriz Balbás
Affiliation:
Departamento de Análisis Económico y Finanzas, Universidad de Castilla – La Mancha, Talavera, Toledo (Spain), E-Mail: [email protected]
José Luis Vilar
Affiliation:
Departamento de Economía Financiera y Contabilidad 1, (Economía Financiera y Actuarial), Universidad Complutense de Madrid, Madrid (Spain) and Actuaris Ibérica, E-Mail: [email protected]

Abstract

In this paper we calculate premiums which are based on the minimization of the Expected Tail Loss or Conditional Tail Expectation (CTE) of absolute loss functions. The methodology generalizes well known premium calculation procedures and gives sensible results in practical applications. The choice of the absolute loss becomes advisable in this context since its CTE is easy to calculate and to understand in intuitive terms. The methodology also can be applied to the calculation of the VaR and CTE of the loss associated with a given premium.

Type
Research Article
Copyright
Copyright © International Actuarial Association 2012

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Footnotes

*

Research supported by Comunidad Autónoma de Madrid (Spain), Grant S2009/ESP-1594, and Spanish Ministry of Science and Technology, Grants ECO2009-14457-C04-02 and ECO2010-22065-C03-01.

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