Optimal Stop-Loss Limits under Non-Expected Utility Preferences
The question of the selection of optimal retentions for insurance contracts is an old problem which has been discussed by almost all prominent actuaries, e.g. Borch, Bühlmann, DeFinetti, Straub and many others. Most of the solutions are based on expected utility preference theory. Recently the work by Denneberg(1985/1990) has shown that non-expected utility preferences may lead to desirable functional premium calculation principles. It is the purpose of this note to illustrate the impact of this approach on the retention problem. Only a specific case study is presented and no attempt to obtain more general results was made so far. We assume the reader is familiar with Denneberg(1990).
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