Ruin Probability Functions and Severity of Ruin as a Statistical Decision Problem

Abstract

It is known that the classical ruin function under exponential claim-size distribution depends on two parameters, which are referred to as the mean claim size and the relative security loading. These parameters are assumed to be unknown and random, thus, a loss function that measures the loss sustained by a decision-maker who takes as valid a ruin function which is not correct can be considered. By using squared-error loss function and appropriate distribution function for these parameters, the issue of estimating the ruin function derives in a mixture procedure. Firstly, a bivariate distribution for mixing jointly the two parameters is considered, and second, different univariate distributions for mixing both parameters separately are examined. Consequently, a catalogue of ruin probability functions and severity of ruin, which are more flexible than the original one, are obtained. The methodology is also extended to the Pareto claim size distribution. Several numerical examples illustrate the performance of these functions.