Insurance Premium Implied by Rank Dependence and Probability Distortion

The zero utility premium principle is generalized under the Cumulative Prospect Theory. Risk attitude and loss aversion are shaped via a utility or a value function, and probabilities of ranked results are replaced by decision weights. Transformation of objective probabilities models probabilistic risk perception. Some properties of the behavioral premium principle are presented. We then discuss an application making specific assumptions about the value function, the probability distortion, and the distribution of the claim. In particular, we study the impact of loss aversion on the premium.