Title

Pricing insurance policies and insurance equities with the Rubinstein-Leland model

Date of Completion

January 2004

Keywords

Economics, Finance

Degree

Ph.D.

Abstract

The highly-skewed and heavily-tailed nature of insurance claims and the potentially asymmetric distributions of insurance equity's returns raise a concern about the validity of the applications of the Capital Asset Pricing Model (CAPM) to insurance pricing. This paper contributes to providing an alternative pricing model—the Rubinstein-Leland model (RL model) that can be adopted to price insurance contracts as well as to estimate the costs of insurance equity. With the distribution-free feature, the RL model can fully capture the characteristic of asymmetry embedded in insurance claims as well as in insurance equities, so that this model theoretically can fairly evaluate the prices. ^