Optimal premium pricing for a heterogeneous portfolio of insurance risks

Athanasios A. Pantelous, Nicholas E. Frangos, Alexandros A. Zimbidis

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The paper revisits the classical problem of premium rating within a heterogeneous portfolio of insurance risks using a continuous stochastic control framework. The portfolio is divided into several classes where each class interacts with the others. The risks are modelled dynamically by the means of a Brownian motion. This dynamic approach is also transferred to the design of the premium process. The premium is not constant but equals the drift of the Brownian motion plus a controlled percentage of the respective volatility. The optimal controller for the premium is obtained using advanced optimization techniques, and it is finally shown that the respective pricing strategy follows a more balanced development compared with the traditional premium approaches.

Original languageEnglish
Article number451856
JournalJournal of Probability and Statistics
Publication statusPublished - 2009
Externally publishedYes

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