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Conditional Tail Expectation and Premium Calculation*

  • Antonio Heras, Beatriz Balbás (a1) and José Luis Vilar (a2)

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.

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Corresponding author

Departamento de Economía Financiera y Contabilidad I, (Economía Financiera y Actuarial), Facultad de Ciencias Económicas, Universidad Complutense de Madrid, (Campus de Somosaguas), 28223 Pozuelo de Alarcón, Madrid (Spain), E-Mail: aheras@ccee.ucm.es

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*

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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References

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Keywords

Conditional Tail Expectation and Premium Calculation*

  • Antonio Heras, Beatriz Balbás (a1) and José Luis Vilar (a2)

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