Stochastic comparisons for allocations of policy limits and deductibles with applications

Abstract

In this paper, we study the problem of comparing losses of a policyholder who has an increasing utility function when the form of coverage is policy limit and deductible. The total retained losses of a policyholder ∑ i = 1 n ( X i − l i ) + are ordered in the usual stochastic order sense when X i ( i = 1 , … , n ) are ordered with respect to the likelihood ratio order. The parallel results for the case of deductibles are obtained in the same way. It is shown that the ordering of the losses are related to the characteristics (log-concavity or log-convexity) of distributions of the risks. As an application of the comparison results, the optimal problems of allocations of policy limits and deductibles are studied in usual stochastic order sense and the closed-form optimal solutions are obtained in some special cases.