Entropy 2005, 7[1], 97-107
ISSN 1099-4300

Physical Premium Principle: A New Way for Insurance Pricing

Amir H. Darooneh

Department of Physics, Zanjan University, P.O.Box 45196-313, Zanjan, Iran.
E-mail: darooneh@mail.znu.ac.ir

Received: 24 November 2004 / Accepted: 22 February 2005 / Published: 28 February 2005

Abstract: In our previous work we suggested a way for computing the non-life insurance premium. The probable surplus of the insurer company assumed to be distributed according to the canonical ensemble theory. The Esscher premium principle appeared as its special case. The difference between our method and traditional principles for premium calculation was shown by simulation. Here we construct a theoretical foundation for the main assumption in our method, in this respect we present a new (physical) definition for the economic equilibrium. This approach let us to apply the maximum entropy principle in the economic systems. We also extend our method to deal with the problem of premium calculation for correlated risk categories. Like the Buhlman economic premium principle our method considers the effect of the market on the premium but in a different way.

Keywords: economic equilibrium; statistical equilibrium; physical entropy; premium calculation principles; economic premium principle.

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