Chapter 14: Ruin Theory

Question 1

Ruin theory

Answer 1

Ruin theory focuses on the probability that an insurer’s free assets (surplus) might fall below a specified lower limit over a specified time horizon:

e = P( U(t) < u1 | U(0) = u0)

Question 2

Lundberg’s inequality

Answer 2

Y(U) <= exp(-RU)

Question 3

e = P( U(t) < ur | U(0) = u0)

What values might we use for e, t and ur for the purposes of setting statutory solvency requirements in South Africa?

Answer 3

e  = 0.005
t = 1
ur = capital requirement as calculated using interim measures

Question 4

define ruin
(risk theory terminology)

Answer 4

A mandatory discontinuation of the company.

If U(t) becomes negative, bankruptcy occurs.