A Model for Pricing Insurance Using Options
Abstract
Traditional Expected Value and Bayesian Methods of pricing insurance products are not robust both under minimal data and frequent portfolio adjustments. Deriving a partial di_erential equation for the price of a an insurance put, parallel is struck with the reverse Black Scholes partial di_erential equation for pricing call options. With appropriate parameter translation of the Black Scholes model, a Pure Premium valuation function that is an improvement over the traditional methods of pricing insurance products results. Its robustness is illustrated with the pricing of a third party insurance product for private cars.
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