Optimal Time to Change Premiums

Erhan Bayraktar and H. Vincent Poor

Abstract: The claim arrival process to an insurance company is modeled by a compound Poisson process whose intensity and/or jump size distribution changes at an unobservable time with a known distribution. It is in the insurance company's interest to detect the change time as soon as possible in order to re-evaluate a new fair value for premiums to keep its profit level the same. This is equivalent to a problem in which the intensity and the jump size change at the same time but the intensity changes to a random variable with a know distribution. This problem becomes an optimal stopping problem for a Markovian sufficient statistic. Here, a special case of this problem is solved, in which the rate of the arrivals moves up to one of two possible values, and the Markovian sufficient statistic is two-dimensional.

Date: 2007-03
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Journal Article: Optimal time to change premiums (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:math/0703828

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