Insurance Pricing and Increased Limits Ratemaking by Proportional Hazards Transforms

Insurance is a practice of exchanging a contingent claim for a fixed payment called a premium. The principle of assigning premiums according to the underlying risk is an essential element of actuarial science. A new premium principle is proposed, where risk loadings are imposed by a proportional decrease in the hazards rates. This premium principle is scale invariant and additive for layers. It is shown that this principle will generate stop-loss contracts as optimal reinsurance arrangements in a competitive market when the reinsurer is less risk-averse than the direct insurer. Finally, increased limits factors are calculated based on this principle.