Insurance and reinsurance contracts as complex derivatives: Application to multiple peril policies

Alan R. Jung, Cyrus A. Ramezani

Abstract

ABSTRACT

Multiple peril insurance schemes (e.g., revenue and earnings insurance) provide protection against adverse movements in several specified risks. Their indemnity payoff function resembles that of exotic options with complex contingencies. In this paper, it is shown how option pricing techniques can be used to calculate fair premiums for three existing revenue insurance contracts. The products are sold by private insurance companies, but are reinsured by the US government. It is also shown that the reinsurance, contract can be valued by the same technique.