Abstract
This work uses classic stochastic dynamic programming techniques to determine the equivalence premium that each of two extraction agents of a non-renewable natural resource must pay to an insurer to cover the risk that the extraction pore explodes. We use statistical and geological methods to calibrate the time-until-failure distribution of extraction status for each agent and couple a simple approximation scheme with the actuarial standard of Bühlmann’s recommendations to charge the extracting agents a variance premium, while the insurer earns a return on its investment at risk. We test our analytical results through Monte Carlo simulations to verify that the probability of ruin does not exceed a certain predetermined level.
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