Pricing for risk in financial transactions

Document description

This paper considers the pricing of uncertain cash flows, which includes those arising in insurance and reinsurance, using the proportional hazards (p-h) transform pricing basis defined by Wang (1995). This basis satisfies all the desirable properties of a sound pricing principle including sub- additivity and layer additivity and is a generalisation of the classic Standard Deviation Principle of Risk Theory, which appears to be valid when the underlying distribution has fixed skewness. The p-h basis deals with all distributions, including empirical ones, by taking account of all their moments in its formulation.