Study on A New Premium Principle and Its Application

Insurance pricing is usually based on classical risk theory which has some uncertain factors because of the disunity to risk pricing and arbitrage-free pricing approach is used widely in financial market. This paper attempts to solve the insurance pricing problem through the financial arbitrage-free pricing method due to the increasing interconnection between insurance and financial market. The risk-neutral probability measure is introduced to establish a new arbitrage-free premium pricing principle in the incomplete insurance market by selecting the risk-neutral probability measure with minimum cross-entropy optimization model. This model is very flexible because of the form of risk-neutral constraints are variable. Moreover, if the constraints are linear in the model, the solution of the optimization model is easily obtained. Meanwhile, the form of insurance pricing is certain. It is showed that the impartiality of this premium principle agrees well with arbitrage-free.