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On the absolute ruin problem in a Sparre Andersen risk model with constant interest On the absolute ruin problem in a Sparre Andersen risk model with constant interest [ 1 ] Radu Mitric, [ 2 ] Andrei Badescu and [ 3 ] David Stanford [ 1 ]

On the absolute ruin problem in a Sparre Andersen risk model with constant interest On the absolute ruin problem in a Sparre Andersen risk model with constant interest [ 1 ] Radu Mitric, [ 2 ] Andrei Badescu and [ 3 ] David Stanford [ 1 ] Department of Mathematics University of Connecticut [ 2 ] Department of Statistics & Actuarial Science University of Toronto [ 3 ] Department of Statistical & Actuarial Sciences University of Western Ontario The 46th Actuarial Research Conference Storrs, CT, August 11-13, 2011 1 / 32
On the absolute ruin problem in a Sparre Andersen risk model with constant interest Outline Outline 1 Definition of the absolute ruin model featuring interest. 2 Gerber-Shiu function for Erlang(n) IAT with Matrix Exponential claim amounts. 3 Closed-form solutions of the absolute ruin probability for Erlang(2) IAT and exponential claims. 4 Conclusions and further extensions. 2 / 32
On the absolute ruin problem in a Sparre Andersen risk model with constant interest Outline Outline 1 Definition of the absolute ruin model featuring interest. 2 Gerber-Shiu function for Erlang(n) IAT with Matrix Exponential claim amounts. 3 Closed-form solutions of the absolute ruin probability for Erlang(2) IAT and exponential claims. 4 Conclusions and further extensions. 2 / 32
On the absolute ruin problem in a Sparre Andersen risk model with constant interest Outline Outline 1 Definition of the absolute ruin model featuring interest. 2 Gerber-Shiu function for Erlang(n) IAT with Matrix Exponential claim amounts. 3 Closed-form solutions of the absolute ruin probability for Erlang(2) IAT and exponential claims. 4 Conclusions and further extensions. 2 / 32
On the absolute ruin problem in a Sparre Andersen risk model with constant interest Outline Outline 1 Definition of the absolute ruin model featuring interest. 2 Gerber-Shiu function for Erlang(n) IAT with Matrix Exponential claim amounts. 3 Closed-form solutions of the absolute ruin probability for Erlang(2) IAT and exponential claims. 4 Conclusions and further extensions. 2 / 32
On the absolute ruin problem in a Sparre Andersen risk model with constant interest Introduction We extend the Compound Poisson ruin model: The surplus process is U ( t ) = u + ct − � N ( t ) j = 1 Y j where u is the initial capital ct stands for the premiums assumed to arrive continuously over time S ( t ) = � N ( t ) j = 1 Y j is the aggregate-claims process, which is a compound Poisson process with rate β > 0 and i.i.d. claim amounts { Y 1 , Y 2 , . . . } with c.d.f. F ( y ) and p.d.f. f ( y ) , y > 0 A positive relative security loading θ is charged 3 / 32
On the absolute ruin problem in a Sparre Andersen risk model with constant interest Introduction We extend the Compound Poisson ruin model: The surplus process is U ( t ) = u + ct − � N ( t ) j = 1 Y j where u is the initial capital ct stands for the premiums assumed to arrive continuously over time S ( t ) = � N ( t ) j = 1 Y j is the aggregate-claims process, which is a compound Poisson process with rate β > 0 and i.i.d. claim amounts { Y 1 , Y 2 , . . . } with c.d.f. F ( y ) and p.d.f. f ( y ) , y > 0 A positive relative security loading θ is charged 3 / 32
On the absolute ruin problem in a Sparre Andersen risk model with constant interest Introduction We extend the Compound Poisson ruin model: The surplus process is U ( t ) = u + ct − � N ( t ) j = 1 Y j where u is the initial capital ct stands for the premiums assumed to arrive continuously over time S ( t ) = � N ( t ) j = 1 Y j is the aggregate-claims process, which is a compound Poisson process with rate β > 0 and i.i.d. claim amounts { Y 1 , Y 2 , . . . } with c.d.f. F ( y ) and p.d.f. f ( y ) , y > 0 A positive relative security loading θ is charged 3 / 32
On the absolute ruin problem in a Sparre Andersen risk model with constant interest Introduction We extend the Compound Poisson ruin model: The surplus process is U ( t ) = u + ct − � N ( t ) j = 1 Y j where u is the initial capital ct stands for the premiums assumed to arrive continuously over time S ( t ) = � N ( t ) j = 1 Y j is the aggregate-claims process, which is a compound Poisson process with rate β > 0 and i.i.d. claim amounts { Y 1 , Y 2 , . . . } with c.d.f. F ( y ) and p.d.f. f ( y ) , y > 0 A positive relative security loading θ is charged 3 / 32
On the absolute ruin problem in a Sparre Andersen risk model with constant interest Introduction We extend the Compound Poisson ruin model: The surplus process is U ( t ) = u + ct − � N ( t ) j = 1 Y j where u is the initial capital ct stands for the premiums assumed to arrive continuously over time S ( t ) = � N ( t ) j = 1 Y j is the aggregate-claims process, which is a compound Poisson process with rate β > 0 and i.i.d. claim amounts { Y 1 , Y 2 , . . . } with c.d.f. F ( y ) and p.d.f. f ( y ) , y > 0 A positive relative security loading θ is charged 3 / 32
On the absolute ruin problem in a Sparre Andersen risk model with constant interest Introduction Single threshold models Sample path: 4 / 32
On the absolute ruin problem in a Sparre Andersen risk model with constant interest Introduction Multiple threshold models Changing premium rates or earning dividends: The insurer’s surplus at time t satisfies  c 1 dt − dS ( t ) , b 0 ≤ U ( t ) < b 1  .   .  . dU ( t ) = c n dt − dS ( t ) , b n − 1 ≤ U ( t ) < b n    c n + 1 dt − dS ( t ) , b n ≤ U ( t )  5 / 32
On the absolute ruin problem in a Sparre Andersen risk model with constant interest Introduction Multi-threshold Compound Poisson Surplus Process with Interest Multi-threshold Compound Poisson Surplus Process with Interest The insurer’s surplus at time t satisfies  c 0 dt + r 0 U ( t ) dt − dS ( t ) , b − 1 = − c 0 / r 0 < U ( t ) < b 0   c 1 dt + r 1 U ( t ) dt − dS ( t ) , b 0 ≤ U ( t ) < b 1     . . dU ( t ) = .  c n dt + r n U ( t ) dt − dS ( t ) , b n − 1 ≤ U ( t ) < b n     c n + 1 dt + r n + 1 U ( t ) dt − dS ( t ) , b n ≤ U ( t )  6 / 32
On the absolute ruin problem in a Sparre Andersen risk model with constant interest Introduction Motivation and problem description Motivation: Ruin models incorporating multiple thresholds allow the insurer to change the premium rate charged depending on the current surplus level. In addition, interest might be earned on the liquid reserves. Conversely, if the surplus drops below zero, the amount of the deficit might be borrowed under a known in advance interest rate. It seem to be realistic to consider models which allow more flexibility upon claims, beyond the Poisson case. We consider a Markovian Arrival Process (MAP) with an underlying continuous time Markov chain with m states (later restricted to a renewal process). 7 / 32
On the absolute ruin problem in a Sparre Andersen risk model with constant interest Introduction Motivation and problem description Motivation: Ruin models incorporating multiple thresholds allow the insurer to change the premium rate charged depending on the current surplus level. In addition, interest might be earned on the liquid reserves. Conversely, if the surplus drops below zero, the amount of the deficit might be borrowed under a known in advance interest rate. It seem to be realistic to consider models which allow more flexibility upon claims, beyond the Poisson case. We consider a Markovian Arrival Process (MAP) with an underlying continuous time Markov chain with m states (later restricted to a renewal process). 7 / 32
On the absolute ruin problem in a Sparre Andersen risk model with constant interest Introduction Motivation and problem description Motivation: Ruin models incorporating multiple thresholds allow the insurer to change the premium rate charged depending on the current surplus level. In addition, interest might be earned on the liquid reserves. Conversely, if the surplus drops below zero, the amount of the deficit might be borrowed under a known in advance interest rate. It seem to be realistic to consider models which allow more flexibility upon claims, beyond the Poisson case. We consider a Markovian Arrival Process (MAP) with an underlying continuous time Markov chain with m states (later restricted to a renewal process). 7 / 32
On the absolute ruin problem in a Sparre Andersen risk model with constant interest Introduction Motivation and problem description Motivation: Ruin models incorporating multiple thresholds allow the insurer to change the premium rate charged depending on the current surplus level. In addition, interest might be earned on the liquid reserves. Conversely, if the surplus drops below zero, the amount of the deficit might be borrowed under a known in advance interest rate. It seem to be realistic to consider models which allow more flexibility upon claims, beyond the Poisson case. We consider a Markovian Arrival Process (MAP) with an underlying continuous time Markov chain with m states (later restricted to a renewal process). 7 / 32

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