Optimal strategies for pricing general insurance

It is found that for both forms the optimal strategy is either to set a premium close to the break-even or not to sell insurance depending on the model parameters. If conditions are suitable for selling insurance then for the first premium strategy, in the case of no market average premium drift, the optimal premium rate is approximately p̄(0)/aT above break-even where p̄(0) is the initial market average premium, a is a constant related to the elasticity of demand and T is the time horizon. The optimal strategy for the second form of premium depends on the volatility of the market average premium. This leads to optimal strategies which generate substantial wealth since then the market average premium can be much larger than break-even leading to significant market exposure whilst simultaneously making a profit. Monte-Carlo simulation is used in order to study the parameter space in this case.