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The time value of ruin in a Sparre Andersen model. With discussion and a reply by the authors. (English) Zbl 1085.62508
Summary: This paper considers a Sparre Andersen collective risk model in which the distribution of the interclaim time is that of a sum of n independent exponential random variables; thus, the Erlang(\(n\)) model is a special case. The analysis is focused on the function \(a(u)\), the expected discounted penalty at ruin, with u being the initial surplus. The penalty may depend on the deficit at ruin and possibly also on the surplus immediately before ruin. It is shown that the function \(a(u)\) satisfies a certain integro-differential equation and that this equation can be solved in terms of Laplace transforms, extending a result of Lin (2003). As a consequence, a closed-form expression is obtained for the discounted joint probability density of the deficit at ruin and the surplus just before ruin, if the initial surplus is zero. For this formula and other results, the roots of Lundberg’s fundamental equation in the right half of the complex plane play a central role. Also, it is shown that \(a(u)\) satisfies Li’s (2003) renewal equation. Under the assumption that the penalty depends only on the deficit at ruin and that the individual claim amount density is a combination of exponential densities, a closed-form expression for \(a(u)\) is derived. In this context, known results of the Cauchy matrix are useful. Surprisingly, certain results are best expressed in terms of divided differences, a topic deleted from the actuarial examinations at the end of last century.

MSC:
62P05 Applications of statistics to actuarial sciences and financial mathematics
91G50 Corporate finance (dividends, real options, etc.)
60K10 Applications of renewal theory (reliability, demand theory, etc.)
60K05 Renewal theory
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