SPARRE ANDERSEN MODEL IN RISK THEORY

CAMARENA PÉREZ, VICTOR DANIEL

Abstract. The objective is to describe a insurance model of col-

lective risk known as Sparre Andersen model. First, we stated the
main hypotheses for construction of the model. Next, we study
the total claim amount process based on a renewal process. After
that, the basic principle for calculating premiums are discussed.
Finally, we approach the problem of ruin in finite time, specifically
we show the asymptotic behavior of the ruin probability.
The next development was extracted from [Ramasubramanian, 2009]
and [Rolski et al., 1999].

1. Main hypotheses
The goal of insurance theory is to model the ocurrence of claims
in an insurance policy. It is common to assume the following general
assumptions.
(1) The number of claims ocurring in a given period is random.
Claims happen at times {Ti } satisfying
0 ≤ T1 ≤ T2 ≤ · · ·
We call them claim ocurrence times.
(2) The i-th claim ocurring at time Ti causes a payment Xi . Here,
{Xi } is i.i.d sequence of nonnegative random variables. These
are called claim sizes.
(3) The claim sizes {Xi } and the ocurrence times {Tj } are inde-
pendent.

2. Total claim amount process

Take T0 = 0, define the claim number process by
Nt = max{i ≥ 0 : Ti ≤ t}, t ≥ 0.
Then we define the total claim amount process by

Nt
X 0 if Nt = 0
St = Xi :=  ,
i=1 X1 + · · · Xk if Nt = k, k = 1, 2, . . .
for t ≥ 0.

Date: February 13, 2019.

Key words and phrases. Renewal process; ruin problem; Sparre Andersen model.
1
 SPARRE ANDERSEN MODEL IN RISK THEORY 2

In Sparre Andersen model, the {Nt : t ≥ 0} is a renewal process.

Here, the sequence of interval times between consecutive claims {Ai }
defined by
Ai = Ti − Ti−1 , i ≥ 1,
is a i.i.d. sequence of nonnegative random variables. From renewal
theorems it follows.
Theorem 1. If A1 and X1 have finite expectation then
(i) limt→∞ 1t St = EX 1
EA1
a.s.
1 EX1
(ii) limt→∞ t E[St ] = EA1 .
(iii) For any h > 0: limt→∞ E[St+h ] − E[St ] = EX1
EA1
h.

3. Basic premium principle

Define the premium income upto time t by a deterministic function
p(t) = ct, t ≥ 0,
where c is the premium rate. The goal is to ensure the average profit
of the company. For example, the expected value principle suggests
pEV (t) = (1 + ρ)E[St ], t ≥ 0,
where ρ > 0 is called safety loading factor. For Sparre Andersen model
we have
EX1
pEV (t) = (1 + ρ) t, t ≥ 0.
EA1
4. Ruin problem
The surplus process is defined by
Rt = x + p(t) − St , t ≥ 0,
where x > 0 is the initial capital, p(t) is the premium income and St
is the total claim amount process of Sparre Andersen model. The ruin
event is  
{Rt < 0 for some t ≥ 0} = inf Rt < 0
t≥0
and the ruin probability ψ(·) is
   
ψ(x) = P inf Rt < 0 | R0 = x := Px inf Rt < 0 , x > 0.
t≥0 t≥0

Define Yi = Xi − cAi , i ≥ 1. Then

Nt
X
Rt = x + c(t − TNt ) − Yi , t ≥ 0,
i=1
and so ruin can occur only at some t = TNt = Tn , n ≥ 0, that is,
n n
  ( ! ) ( )
X X
inf Rt < 0 = inf − Yi < −x = sup Yi > x .
t≥0 n≥0 n≥0 i=1
i=1
The random walk theory we say that when Y1 have finite expectation:
 SPARRE ANDERSEN MODEL IN RISK THEORY 3

a) If EY1 < 0 then limn→∞ ni=1 Yi = −∞ a.s.

P

b) If EY1 > 0 then limn→∞ ni=1 Yi = +∞ a.s.

P

c) If EY1 = 0 and Y1 is no degenerated then

n
X n
X
lim inf Yi = −∞, lim sup Yi = +∞ a.s..
n→∞ n→∞
i=1 i=1

Next, we have a sufficient condition for a ruin in finite time.

Proposition 1. If EX1 − cEA1 = EY1 ≥ 0 then the ruin probability
ψ(x) = 1, x > 0.
We say that Sparre Andersen model satisfies the net profit condition
if EX1 − cEA1 = EY1 < 0. In this case you can only guarantee that
ψ(x) < 1, x > 0.
Define the ascending ladder height by
 Pn
+
Yτ + if τ + = min{n ≥ 1 : i=1 Yi > 0} < ∞
Y = .
∞ otherwise
Then
Pn
the distribution of the ladder height of random walk
{ i=1 Yi : n ≥ 0} is G+ (x) = P(Y + ≤ x) and
G0 (x) = G+ (x)/G+ (∞)
is a proper distribution.
Theorem 2. If assume the net profit condition then
p := G+ (∞) < 1
and for all x > 0
∞
pn G0 ∗n (x)
X
ψ(x) = (1 − p)
n=1

where G0 ∗n is the n-th convolution of G0 and G0 ∗n (x) = 1 − G0 ∗n (x) is

the tail function.
Finally, the aim is to determine the asymptotic behavior of the ruin
probability. Assume that the moment-generating function of Y1 exists
in a neighborhood of zero and the equation
h i
E eh(X1 −cA1 ) = 1, h > 0,
admits unique solution denoted by r and called Lundberg coefficient.
Theorem 3. Under the previous hypotheses we have
ψ(x) ≤ e−rx , x > 0.
More over, the ruin probability decays exponentially.
 SPARRE ANDERSEN MODEL IN RISK THEORY 4

Theorem 4. We have
lim erx ψ(x) = c
x→∞
where the constant c ≥ 0 is finite and given by
1 − G+ (∞)
c = R ∞ rv + .
r 0 ve dG (v)
References
[Ramasubramanian, 2009] Ramasubramanian, S. (2009). Lectures on Insurance
Models. Texts and Readings in Mathematics. Hindustan Book Agency.
[Rolski et al., 1999] Rolski, T., Schmidli, H., Schmidt, V., and Teugels, J. (1999).
Stochastic Processes for Insurance & Finance. Wiley Series in Probability and
Statistics. John Wiley & Sons Ltd.

National University of Engineering, Peru.

E-mail address: vcamarenap@uni.pe