B.Sc. (Hons) Mathmetics LAPLACE TRNSFORMS PDF

LAPLACE TRANSFORMS FOR
FINDING EXPLICIT SOLUTIONS

FOR SURVIVAL PROBABILITIES:
THE FINITE TIME CASE
Final year project submitted to the Dept. of Mathematics of the

University of Portsmouth
May 2011
By
Sarah Oldershaw
B.Sc. (Hons) Mathematics
Supervisor: Dr. Athena Makroglou
Second Reader: Ms Lynn Pevy

Contents
Abstract 4
Acknowledgements 5
1 Introduction 6
2 Background material 9
3 Introduction to Models for Finite Time Ruin 17
4 Laplace Transforms of φ and σ(u, t) 19
5 Distributions of Claims 35
6 Numerical Results 43
7 Conclusions 47
Bibliography 49
2
List of Tables
6.1 Exponential using Explicit Formula (6.1), for u = 0, 1, 2, ..., 5: c =

1.1: α = 1: λ = 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
6.2 Exponential using Explicit Formula (6.1), for u = 6, 7, 8, 9, 10: c =
1.1: α = 1: λ = 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
6.3 Exponential using Numerical Inversion of (5.7), c = 1.1: α = 1:
λ=1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
3
Abstract
An important problem of actuarial risk management is the calculation of the

probability of ruin. Using probability theory and the definition of the Laplace
transform we obtain expressions, in the classical risk model, for survival probabil-
ities in a finite time horizon. Then explicit solutions are found with the inversion
of the double Laplace transform; using algebra, the Laplace complex inversion
formula and Matlab, for the exponential claim amount distribution. To do this
we consider Garcia (2005) and understand the paper in more detail. To achieve
the aim of the project, theory of Laplace transforms and Complex Analysis is
needed. In addition, some numerical results are given, using the explicit formulae
and numerical inversion of the single Laplace transform of the survival probability.
The project was typed in LATEX and is accompanied by a CD where the asso-
ciated files and Matlab programs (.pdf, .tex, .m etc) are to be found.
4
Acknowledgements
I would like to thank Prof. Jorge Garcia for his helpful communications with my
supervisor Dr. Athena Makroglou, which clarified values of the parameters used
and kindly reconfirmed certain numerical results on my behalf.
I would also like to thank Athena for all her amazing help and encouragement
which enabled me to complete this project.
I also wish to thank Ms Lynn Pevy for accepting to be the 2nd reader of
the project and for her help during lectures with questions regarding matters of
Complex Analysis.
5
Chapter 1
Introduction
This project is concerned with finding formulae for finite time survival probabili-
ties, by the complex inversion of the corresponding Laplace transforms, following
and expanding Garcia (2005).
Insurance is devised to protect against significant financial impact that has

occurred from random events. It is restricted to reducing the effect of random
events that can be evaluated in monetary terms. For instance pain and suffering
is difficult to measure in monetary terms compared with the destruction of a
property by a fire which is easy to measure financially. Another important aspect
is the randomness of the event, the probability of an event happening before or
after taking out insurance does not change, and if an event is deliberately caused
by an individual then it is deemed as non-random and the insurer would not pay
out the claim amount. Insurance systems improve the prospect that plans will
not be frustrated by random events. The insurer issues policies that promise to
pay the insured a claim payment in return for a premium. [6]
The classical risk model is of the form:
U (t) = u + ct − Y (t) t ≥ 0.
6
CHAPTER 1. INTRODUCTION 7
There are many models for finding expressions in finite time horizons for the
time to ruin in literature. Some of which are Usabel (1999) [15] using the Gaver-
Stehfest inversion technique, Cardoso and Waters (2005) [16] using Markov chains
and Avram and Usabel (2003) [17] using one Laplace inversion. The main re-
search papers studied for this project are Garcia (2005) [1] which is the method
followed in this project, Gerber and Shiu (1998) [4] which captures the double
Laplace transform, and Drekic and Willmot (2003) [18] who considered the den-
sity of the time to ruin for exponentially distributed claims.
There are also several books for an introduction to the subject of acturial
mathematics, a partial list of which includes: Bowers et al. (1997) [6], Dickson
and Hipp (2001) [3], Dickson et al. (2009) [19] and Gupta and Varga[20].
The aim of the project is to find explicit formulas for the finite time sur-
vival probability by means of the complex inversion of the corresponding Laplace
transform, and computing using the explicit formula for the survival probability
σ(u, t) and a method for the numerical inversion of it’s single Laplace transform.
There are five main parts to this project. Firstly, the background research sec-
tion covers all of the knowledge needed for the theoretical side of the project, this
includes all the propositions and formulas for Laplace transforms and complex
analysis. The introduction to models for finite time ruin describes the notation
and the problem of calculating survival probabilities. The next chapter shows the
calculations used to compute the Laplace transforms of ψ and σ(u, t). The distri-
butions of claims describes three different distributions, their Laplace transform
ˆ t). The distributions studied are exponential,
and works through to find σ̂(u,
Erlang(2) and mixed exponential. The final part of this project conveys the nu-
merical results for two methods to find values for σ(u, t) and conclusions for these
results.
The project was typed in LATEX and is accompanied by a CD where the asso-
ciated files and Matlab programs (.pdf, .tex, .m etc) are to be found.
The Harvard system was used for the bibliography.

(http://referencing.port.ac.uk/apa/index.html).
CHAPTER 1. INTRODUCTION 8
Notation (using that of Garcia (2005))[1]:
U (t), t ≥ 0: The surplus at time t

u: The initial reserve at t=0
c: The constant premium income
per unit of time
{Y (t)}t≥0 : Compound Poisson process,
with parameter λ,
where Y (t) is the aggregate claims amount
up to time t, Y (0) = 0
g(t): Density function of the time
between two consecutive claims
g(t) = λe−λt .
X: Single claim amount
random variable with distribution
function F (x) and density function f (x).
Ft (x), ft (x): Distribution and density functions
of the aggregate claims amount
up to time t.
ψ(u, t): Finite time probability
up to time t, considering
an initial reserve u.
σ(u, t) = 1 − ψ(u, t): Corresponding survival function
ψ(u) = ψ(u, ∞): The ultimate ruin probability
σ(u) = 1 − ψ(u): The ultimate non-ruin probability
T: The time to ruin
Chapter 2
Background material
Product Rule [9]
The product rule allows a product of functions to be differentiated.
If f and g are differentiable at x, then so is the product fg, and
d du dv
uv = v+u . (2.1)
dx dx dx
Chain rule [9]
The chain rule allows a composition of two or more functions to be differen-

tiated.
If g is differentiable at x and f is differentiable at g(x), then the composition

f o g is differentiable at x. Morover, if
y = f (g(x)) and u = g(x) then y = f (u) and
dy dy du
= . (2.2)
dx du dx
9
CHAPTER 2. BACKGROUND MATERIAL 10
Generalized Leibnitz Formula [8]
Z β(x) Z β(x)
d ∂F
F (x, y)dy = (x, y)dy
dx α(x) α(x) ∂x
dβ dα
+ F (x, β(x)) (x) − F (x, α(x)) (x). (2.3)
dx dx
The Laplace Transform [2]
The Laplace transform is a mapping from points in the time domain, t, to

points in the frequency domain, s. The variable s often has to take complex
values. It is a method used to solve linear differential equations using the expo-
nential function and integrals.
Given a suitable function F (t) the Laplace Transform, written f (s) is defined
by
Z ∞
f (s) = F (t)e−st dt.
0
Notation used in this paper for the Laplace Transform of F (t) is L{F (t)} or
F̂ (s)
If the function has two independent variables (t,x), the definition above can
be used with respect to each variable.[1]
Z ∞
F̂ (t, s) = e−sx F (t, x)dx,
0
Z ∞
F̂ (δ, x) = e−δt F (t, x)dt.
0
Combining these the definition for the double Laplace transform is produced:
Z ∞ Z ∞
ˆ
F̂ (δ, s) = e−δt−sx F (t, x)dtdx. (2.4)
0 0
Theorem 1.2 (Linearity) [2] page 5
If F1 (t) and F2 (t) are two functions whose Laplace Transforms exist, then
L{aF1 (t) + bF2 (t)} = aL{F1 (t)} + bL{F2 (t).} (2.5)
where a and b are arbitrary constants
Derivative property of the Laplace Transform [2]
Suppose a differentiable function F (t) has Laplace Transform f (s), we can

find the Laplace Transform
Z ∞
0
L{F (t)} = e−st F 0 (t)dt. (2.6)
0
of its derivative F 0 (t) through the following theorem
Theorem 2.2 [2] page 14
Z ∞
0
L{F (t)} = e−st F 0 (t)dt = −F (0) + sf (s).
0
Inverse laplace Transform
If F (t) has the Laplace Transform f (s), that is L{F (t)} = f (s) then the
Inverse Laplace Transform is defined by L−1 {f (s)} = F (t) and is unique apart
from null functions.
R∞
F (t, x) = 0
esx F̂ (t, s)ds.
Convolution [2] page 37
The convolution of two given functions f (t) and g(t) is written f ∗ g and is
defined by the integral
Z t
f ∗g = f (τ )g(t − τ )dτ. (2.7)
0
Theorem 3.4 [2] page 38
If f (t) and g(t) are two functions of exponential order (so that their Laplace
Transforms exist), and writing L{f } = fˆ(s) and L{g} = ĝ(s) as the two Laplace
Transforms then L−1 {fˆĝ} = f ∗ g where ∗ is the convolution operator above.
It follows that
L{f (t) ∗ g(t)} = fˆ(s)ĝ(s). (2.8)
Laplace Transform of an Integral [2] page 16
Z t
f (s)
L F (u)du = . (2.9)
0 s
Laplace Transform of 1 [2] from table on page 227
1
L{1} = . (2.10)
s
Probability Theory [7]
Counting Process [7] page 302
A stochastic process {N (t),t ≥ 0} is said to be a counting process if N (t)

represents the total number of ”events” that occur by time t.
From its definition we see that for a counting process N (t) must satisfy:
(i) N (t) ≥ 0.
(ii) N (t) is integer valued.
(iii) If s < t, then N (s ≥ N (t).
(iv) For s < t, N (t) − N (s) equals the number of events that occur in the
interval (s, t].
Poisson Process [7] page 304
The counting process {N (t),t ≥ 0} is said to be a Poisson process having rate

λ, λ > 0, if
1) N (0) = 0
2) The process has independent increments
3) Number of events in any interval of length t, is Poisson distributed with

mean λt. That is, for all s,t ≥ 0
(λt)n
P {N (t + s) − N (s) = n} = eλt , n = 0, 1, ...
n!
The Laurent Series [12] page 137
The Laurent Series is a generalized version of a Taylor series in which there

are negative as well as positive powers of z − c.
Let f be holomorphic in the punctured disc D0 (c, R) where R > 0. Then there
exists complex numbers an (n ∈ Z) such that, for all z in D0 (a, R),
P∞
f (z) = n=−∞ an (z − c)n .
If 0 < r < R, then
1
R f (w)
an = 2πi k(0,r) (w−c)n+1
dw.
P−1
The sum g(z) = n=−∞ an (z − c)n is called the principal part of f at c.
Definition of a Residue [11]
Let z0 be an isolated singular point of a function f (z). Then by the residue

of f (z) at z0 , denoted by
Res(z = z0 )f (z)
is meant the coefficient c−1 in the Laurent expansion
∞
X
f (z) = cn (z − z0 )n .
n=−∞
Note that the residues of f (z) at z0 may be zero or nonzero if z0 is a pole or

an essential singular point, but is automatically zero if z0 is a removable singular
point.
Complex Inversion Formula [10] page 471
Theorem 8.2.1
Suppose that F(z) is analytic on C except for a finite number of isolated

sigularities and that for some real number σ, F is analytic on the half plane
{z|Rez > σ}. Suppose also that there are positive constants M, R, and β such
M
that |F (z)| ≤ |z| β whenever |z| ≥ R. For t ≥ 0, let
X
f (t) = {residues of est F (z) at each of its singularities in C}. (2.11)
Then f˜(z) = F (z) for Re z > σ. We call this the complex inversion formula.
Calculation of Residues [10] page 244
Removable Singularities
Let f be analytic in a deleted neighbourhood of z0 . f has a removable singu-

larity at z0 if and only if limz→z0 (z − z0 )f (z) = 0.
Proposition 4.1.1
If g(z) and h(z) are analytic and have zeros at z0 of the same order, then
f(z)=g(z)/h(z) has a removable singularity at z0 .
Likewise, if g has a zero at z0 or order greater than h, then g/h has a removable
singularity at z0 and
Res(f ; z0 ) = 0.
Simple Pole
If limz→z0 (z − z0 )f (z) exists and is nonzero then f has a simple pole at z0 and
this limit equals the residue.
Proposition 4.1.2
Let g and h be analytic at z0 and assume that g(z0 ) 6= 0, h(z0 ) = 0, and h0 (z0 ) 6= 0.
Then f(z)=g(z)/h(z) has a simple pole at z0 and
g(z0 )
Res(f ; z0 ) = . (2.12)
h0 (z0 )
Chapter 3
Introduction to Models for Finite

Time Ruin
Surplus is the excess of the initial fund plus premiums collected over the claims
period minus the claims paid out.
The premiums collected are denoted c(t), however assuming a constant pre-
mium rate per unit of time, c(t) can be set to ct.[6]
Consider a company which has a surplus at time t which is
U (t) = u + ct − Y (t), t≥0
This is the initial reserve, plus the premium income minus the amount claimed.[6]
Surplus increases linearly with a slope of c, except when a claim occurs when
the surplus would drop by the amount of that claim. [6]
When the surplus first falls below zero and becomes negative we say that ruin
has occurred. [6]
We denote the time to ruin by T , which is T = min{t : t ≥ 0 and U (t) < 0}.
If the surplus never becomes negative then ruin never occurs and the time of ruin
will be ∞.[6]
17
CHAPTER 3. INTRODUCTION TO MODELS FOR FINITE TIME RUIN 18
If U (t) ≥ 0 for all t then T = ∞.[6]
The probability of ruin is considered as a function of u, ψ(u), and is the prob-

ability that the time of ruin is less than infinity. This is a consequence of the
variety of the amount and timing of claims.[6]
ψ(u) = P r(T < ∞).
In this project the finite time case only is considered and the probability of
ruin before time t is denoted by ψ(u, t) = P r(T < t). The survival probability,
denoted σ(u, t), is the probability that ruin does not occur so it is 1 minus the
probability of ruin.
σ(u, t) = 1 − ψ(u, t).
Like Garcia (2005) we assume that the counting claims process is a homoge-
neous Poisson process. The interarrival time between two consecutive indepen-
dent claims is denoted by g(t)[1]. Starting at time 0 let τ1 be the time until
the next claim then P r(τ1 > t) = e−λt . Therefore the distribution function is
P r(τ1 ≤ t) = 1 − e−λt . As the density function is the distribution function differ-
entiated then g(t) = λe−λt which follows an exponential distribution.
A single claim amount, random variable X, has density function f (x) which
is the derivative of the distribution function F (x), therefore f (x) = F 0 (x). It is
assumed that the Laplace transform of the single claim amounts is known.[1]
In the next section of this project we derive the Laplace transform of φ(u)
after integrating, along with the double Laplace transform of σ(u, t). Once the
double Laplace transform is derived we then use the complex inversion formula
and Matlab to invert the double Laplace transform before finding explicit results
for the exponential distribution claim.
Chapter 4
Method by Garcia (2005), The

Laplace Transforms of φ and
σ(u, t)
The Laplace Transforms of φ and σ(u, t)
φ(u) is the Laplace transform corresponding to the random variable T .
Considering the instant and amount of the first claim it is valid that (Garica
(2005) [1] page. 115):
Z ∞
φ(u) = g(t)[1 − F (u + ct)]e−δt dt
Z0 ∞ Z u+ct
−δt
+ g(t)e f (x)φ(u + ct − x)dxdt. (4.1)
0 0
Using (4.1) the following differential equation is obtained for φ0 (u) as follows
Z u
0
cφ (u) = (λ + δ)φ(u) − λ(1 − F (u)) − λ f (x)φ(u − x)dx. (4.2)
0
19
CHAPTER 4. LAPLACE TRANSFORMS OF φ AND σ(U, T ) 20
Proof of (4.2)
The premiums collected assuming a constant premium rate per unit of time
is denoted by ct, and the initial reserve is denoted by u.
First the integration variable is changed using:
s = u + ct
s−u
t =
c
ds
= c
dt
dt = c−1 ds.
Substituting this is into (4.1) we get:

∞
s−u
Z
s−u
φ(u) = g [1 − F (s)]e−δ c c−1 ds
c
Zu ∞
s − u −δ s−u s
Z
+ g e c f (x)φ(s − x)dxdsc−1 ,
u c 0
∞

s−u
Z
s−u
−1
φ(u) = c g [1 − F (s)]e−δ c ds
c
Zu ∞
Z
−1
+ c g e c f (x)φ(s − x)dxds. (4.3)
u c 0
Differentiating (4.3) using Leibnitz formula in (2.3) we get:
∞
s−u
Z
0 −1 ∂ −δ s−u
φ (u) = c g [1 − F (s)]e c ds
u ∂u c
Z ∞
Z
−1 ∂
+ c g e c f (x)φ(s − x)dx ds
u ∂u c 0

−1 du u−u u−u
− c g [1 − F (u)]e−δ c
du c
u − u −δ u−u u
Z
−1 du
− c g e c f (x)φ(u − x)dx.
du c 0
u−u
u−u du
= 1 and e−δ

Simplifying using g c
= g(0), du
c = e0 = 1,
∞
s−u
Z
0 ∂ −1 −δ s−u
φ (u) = c g [1 − F (s)]e c ds
u ∂u c
Z ∞
Z
−1 ∂
+ c g e c f (x)φ(s − x)dx ds
u ∂u c 0
Z u
−1 −1
− c g(0)[1 − F (u)] − c g(0) f (x)φ(u − x)dx.
0
To simplify this the chain rule (2.2) and the product rule (2.1) was used.
∂
Since ∂u
(1 − F (s)) = 0 and,
∂g s−u
s−u
∂ s−u c
∂ c
g = s−u
,
∂u c ∂ c ∂u

∂ s−u 0 s−u −1
g = g .
∂u c c c
We may write
∞
s−u
Z
0 −1 1 0 s−u
φ (u) = c − g [1 − F (s)]e−δ c ds
c c
Zu ∞
−1 s−u δ −δ s−u
+ c g [1 − F (s)] e c ds
c c
Zu ∞
Z
−1 1 0
+ c − g e c f (x)φ(s − x)dxds
u c c 0
Z ∞
δ −δ s−u s

s−u
Z
−1
+ c g e c f (x)φ(s − x)dxds
u c c 0
Z u
−1 −1
− c g(0)[1 − F (u)] − c g(0) f (x)φ(u − x)dx.
0
Using (4.3)
∞
s−u
Z
δφ(u) δ −δ s−u
= c−1 g [1 − F (s)] e c ds
c u c c
Z ∞
δ −δ s−u s

s−u
Z
−1
+ c g e c f (x)φ(s − x)dxds.
u c c 0
Thus
∞
s−u
Z
s−u
0 −2 0
φ (u) = −c g [1 − F (s)]e−δ c ds
c
Z ∞u
Z
−2 0
− c g e c f (x)φ(s − x)dxds
u c 0
Z u
−1 −1
− c g(0)[1 − F (u)] − c g(0) f (x)φ(u − x)dx
0
δ
+ φ(u).
c
Multiplying through by c results in:
Z u
0
cφ (u) = −g(0)(1 − F (u)) − g(0) f (x)φ(u − x)dx
0
Z ∞
−1 0 s−u s−u
− c g (1 − F (s))e−δ c ds
c
Zu ∞
Z
−1 0
− c g e c f (x)φ(s − x)dxds + δφ(u). (4.4)
u c 0
In the introduction it was shown that the density function of the counting
claims process is g(t) = λe−λt . Using this we have:
g(t) = λe−λt , (4.5)

g(0) = λe0 = λ, (4.6)
g 0 (t) = −λ2 e−λt = −λg(t). (4.7)
Substituting in (4.5), (4.6) and (4.7) we get:
Z u
0
cφ (u) = −λ(1 − F (u)) − λ f (x)φ(u − x)dx
0
Z ∞
−1 s−u s−u
− c −λg (1 − F (s))e−δ c ds
c
Zu ∞
Z
−1
− c −λg e c f (x)φ(s − x)dxds + δφ(u),
u c 0
or
Z u
0
cφ (u) = −λ(1 − F (u)) − λ f (x)φ(u − x)dx
0
Z ∞
−1 s−u s−u
+ λ[c g (1 − F (s))e−δ c ds
c
Z ∞u
Z
−1
+ c g e c f (x)φ(s − x)dxds] + δφ(u).
u c 0
Substituting everything in the square bracket above for (4.1) gives:
Z u
0
cφ (u) = −λ(1 − F (u)) − λ f (x)φ(u − x)dx + λφ(u) + δφ(u).
0
Ru
cφ0 (u) = (λ + δ)φ(u) − λ(1 − F (u)) − λ 0
f (x)φ(u − x)dx (4.2).
which completes the proof of (4.2).

Finding the Laplace transform of φ(u)
It will be shown that
λ ˆ
s
− 1) − λρ (fˆ(ρ) − 1)
(f (s)
φ̂(s) = . (4.8)
cs − λ − δ + λfˆ(s)
Proof of (4.8):
Laplace both sides of (4.2)
Using (2.6) we have,
L{cφ0 (u)} = cL{φ0 (u)} = c(sφ̂(s) − φ(0)) = csφ̂(s) − cφ(0).
For the right hand side of (4.2) we have,
L{(λ + δ)φ(u)} = (λ + δ)L{φ(u)} = (λ + δ)φ̂(s).
L{−λ(1 − F (u))} = −λL{1 − F (u)} = −λ[L{1} − L{F (u)}].
The density function of the single claim amount is the distribution function
differentiated. Therefore the distribution function is the integral of the density
function, shown below, and this is substituted in.
Z
F (u) = f (u)du.
Using (2.9) and (2.10),
1 fˆ(s)
Z
1
−λ L{1} − L f (u)du = −λ( − ) = −λ (1 − fˆ(s)).
s s s
Finally using (2.7) and (2.8):

Z u
L −λ f (x)φ(u − x)dx = −λL{f (u) ? φ(u)} = −λfˆ(s)φ̂(s).
0
Putting this all together we get:
1
csφ̂(s) − cφ(0) = (λ + δ)φ̂(s) − λ (1 − fˆ(s)) − λfˆ(s)φ̂(s).
s
Then rearranging for φ̂(s) and simplifying
1
csφ̂(s) − (λ + δ)φ̂(s) + λfˆ(s)φ̂(s) = cφ(0) − λ (1 − fˆ(s))
s
λ
φ̂(s)(cs − λ − δ + λfˆ(s)) = cφ(0) − (1 − fˆ(s)).
s
(4.9)
or
cφ(0) − λs (1 − fˆ(s))
φ̂(s) =
cφ(0) + λs (fˆ(s) − 1)
φ̂(s) = . (4.10)
Note that if the denominator of (4.10) is made to equal zero we get:
λ + δ − cs = λfˆ(s). (4.11)
which are the solutions of the Lundberg’s fundamental equation.
So there is a non-negative root which we will call ρ. When s = ρ the denom-

inator vanishes, which means ρ must also be a zero of the numerator for it to
make mathematical sense. Substituting s = ρ into (4.10) we get:
cφ(0) + λρ (fˆ(ρ) − 1)
φ̂(ρ) = .
cρ − λ − δ + λfˆ(ρ)
From above we had:
cρ − λ − δ + λfˆ(ρ) = 0.
Therefore:
λ
0 = cφ(0) + (fˆ(ρ) − 1)
ρ
λ ˆ
cφ(0) = − (f (ρ) − 1)
ρ
− λρ (fˆ(ρ) − 1)
φ(0) =
c
−λ(fˆ(ρ) − 1)
φ(0) = .
cρ
or
λ(1 − fˆ(ρ))
φ(0) = . (4.12)
ρc
Substituting (4.12) into (4.10) we get:
cλ(1−fˆ(ρ))
ρc
+ λs (fˆ(s) − 1)
φ̂(s) =
λ
ρ
(1 − fˆ(ρ)) + λs (fˆ(s) − 1)
φ̂(s) =
or
λ ˆ
s
(f (s)−1)− λ
ρ
(fˆ(ρ)−1)
φ̂(s) = cs−λ−δ+λfˆ(s)
. (4.8)
This completes the proof of φ̂(s) (4.8).

Finding the Double Laplace Transform of σ(u, t)
First it will be shown that
ˆ δ) = 1 − φ̂(s) .
σ̂(s, (4.13)
δs δ
Next it will be shown that
ˆ δ) = s−ρ
σ̂(s, . (4.14)
sρ[cs − λ − δ + λfˆ(s)]
Proving (4.13)
Consider the density.
Z t
∂
σ(u, t) = 1 − ψ(u, t) = 1 − ψ(u, v)dv. (4.15)
0 ∂v
Using (2.4), the definition of a double Laplace transform in Garcia (2005) [1]
and altering this equation to change it into an equation we can work with the
variables we are using we get:
Z ∞ Z ∞
ˆ δ) =
σ̂(s, e−su−δt σ(u, t)dudt
Z0 ∞ Z0 ∞
ˆ δ) =
σ̂(s, e−su e−δt σ(u, t)dudt
Z0 ∞ 0 Z ∞
ˆ δ) =
σ̂(s, e−δt e−su σ(u, t)dudt.
0 0
Substitute in (4.15) for σ(u, t) and multiply out the brackets

Z ∞ Z ∞ Z t
ˆ δ) = −δt ∂ −su
σ̂(s, e e ψ(u, v)dv dudt 1−
0 0 0 ∂v
Z ∞ Z ∞ Z ∞ Z ∞ Z t
ˆ δ) = −δt −su −δt −su ∂
σ̂(s, e e dudt − e e ψ(u, v)dv dudt.
0 0 0 0 0 ∂v
We will now call the second half of the right hand side A for now.
Z ∞ Z ∞ Z t
−δt −su ∂
A=− e e ψ(u, v)dv dudt.
0 0 0 ∂v
Therefore
Z ∞ Z ∞
ˆ δ) =
σ̂(s, e −δt
e−su dudt + A
Z0 ∞ 0
∞
ˆ δ) = −δt 1 −su
σ̂(s, e − e dt + A
0 s u=0
Z ∞
ˆ δ) = −δt 1
σ̂(s, e 0+ dt + A
0 s
Z ∞
ˆ δ) = 1 −δt
σ̂(s, e dt + A
0 s
∞
ˆ δ) = 1 −δt
σ̂(s, − e +A
δs t=0
ˆ δ) = 1
σ̂(s, + A. (4.16)
δs
Next we need to find A. We will label the function that is undergoing a double
Laplace transform h(u, t)
Z ∞ Z ∞ Z t
−δt −su ∂
A = − e e ψ(u, v)dv dudt
0 0 0 ∂v
Z ∞ Z ∞
A = − e−δt e−su h(u, t)dudt
Z0 ∞ 0
A = − e−δt Lu {h(u, t)}dt. (4.17)

0
Next we will work out the Laplace transform of h(u, t) and then substitute it
back into (4.17).
Z t
∂
Lu {h(u, t)} = Lu ψ(u, v)dv
0 ∂v
Z t
∂
Lu {h(u, t)} = Lu {ψ(u, v)}dv
0 ∂v
Z t
∂
Lu {h(u, t)} = ψ̂(s, v)dv,
0 ∂v
(4.18)
Thus
Z ∞ Z t
−δt ∂
A = − e ψ̂(s, v)dvdt. (4.19)
0 0 ∂v
Equation (4.19) also is a Laplace transform following the definition from the
background research if we call the function h1 (s, t).
Let
Z t
∂
h1 (s, t) = ψ̂(s, v)dv,
0 ∂v
Then
Z ∞
A = − e−δt h1 (s, t)dt
0
Z t
∂
A = −Lt {h1 (s, t)} = −Lt ψ̂(s, v)dv .
0 ∂v
Using some rules of Laplace transforms below we can find A, [2] page 16.
Rt
The Laplace transform of 0
F (u)du is found by:
L{F (t)} = f (s) = sL{g(t)}. (4.20)

Z t
g(t) = F (u)du.
0
f (s)
L{g(t)} = .
s
Rt ∂
So our g(t) is 0 ∂v ψ̂(s, v)dv and we name our F (u) as h2 (s, v) then applying
the above rule we get,
Z t
A = −Lt h2 (s, v)dv
0
Lv {h2 (s, v)}
A = −
δ
or
∂
Lv { ∂v ψ̂(s, v)}
A = − . (4.21)
δ
In (4.21) the numerator is the Laplace transform of a derivative. For this

using formula (2.6) A becomes,
−δLv {ψ̂(s, v)} + ψ̂(s, 0)

A= . (4.22)
δ
ˆ δ) = 1 δLv {ψ̂(s, v)} ψ̂(s, 0)

σ̂(s, − +
δs δ δ
ˆ δ) = 1 ψ̂(s, 0)
σ̂(s, − Lv {ψ̂(s, v)} +
δs δ
ˆ δ) = 1 ψ̂(s, 0)
σ̂(s, −ˆˆψ(s, δ) + . (4.23)
δs δ
From Garcia [1] we have φ(u) = −ψ(u, 0) + δ ψ̂(u, δ) therefore if we Laplace

ˆ
both sides and rearrange for ψ̂(s, δ) we get:
L{φ(u)} = L{−ψ(u, 0)} + δL{ψ̂(u, δ)}

ˆ
φ̂(s) = −ψ̂(s, 0) + δ ψ̂(s, δ),
and thus
ˆ φ̂(s) ψ̂(s, 0)
ψ̂(s, δ) = + . (4.24)
δ δ
To finish the double Laplace transform substitute (4.24) into (4.23) and sim-
plify to get,
ˆ δ) = 1 φ̂(s) ψ̂(s, 0) ψ̂(s, 0)

σ̂(s, −( + )+
δs δ δ δ
ˆ δ) = 1 − φ̂(s) − ψ̂(s, 0) + ψ̂(s, 0) ,
σ̂(s,
δs δ δ δ
thus
ˆ δ) =
σ̂(s, 1
− φ̂(s)
, (4.13)
δs δ
and this completes the proof of (4.13).

Proving (4.14)
Next substituting (4.10) into (4.13) we get:
cφ(0)+ λs (fˆ(s)−1)
ˆ δ) = 1 cs−λ−δ+λfˆ(s)
σ̂(s, −
δs δ
ˆ δ) 1 cφ(0) + λs (fˆ(s) − 1)
σ̂(s, = −
δs δ[cs − λ − δ + λfˆ(s)]
ˆ δ) cs − λ − δ + λfˆ(s) s(cφ(0) + λs (fˆ(s) − 1))

σ̂(s, = −
δs(cs − λ − δ + λfˆ(s)) sδ[cs − λ − δ + λfˆ(s)]
ˆ δ) cs − λ − δ + λfˆ(s) − s(cφ(0) + λs (fˆ(s) − 1))

σ̂(s, =
sδ[cs − λ − δ + λfˆ(s)]
ˆ δ) cs − λ − δ + λfˆ(s) − scφ(0) − λs s
(fˆ(s) − 1)
σ̂(s, =
ˆ δ) cs − λ − δ + λfˆ(s) − scφ(0) − λfˆ(s) + λ
σ̂(s, =
ˆ δ) cs − δ − scφ(0)
σ̂(s, =
ˆ δ) = − −cs + δ + csφ(0)
σ̂(s, . (4.25)
Using the same arguments and before we know (4.25) must have a non-
negative root ρ and a negative root R so that the numerator of (4.25) will equal
zero also for s = ρ as the numerator will vanish .
cρ − δ − cρφ(0) = 0
cρφ(0) = cρ − δ
cρ δ
φ(0) = −
cρ cρ
δ
φ(0) = 1 − . (4.26)
cρ
δ
−cs + δ + cs(1 − cρ )
ˆ δ) = −
σ̂(s,
csδ
−cs + δ + cs − cρ
ˆ δ) = −
σ̂(s,
δ − sδρ
ˆ
σ̂(s, δ) = −
δ( ρs − 1)
ˆ δ) =
σ̂(s,
s
ρ
−1
ˆ δ) =
σ̂(s,
s[cs − λ − δ + λfˆ(s)]
sρ
ρ
−ρ
ˆ δ) =
σ̂(s,
sρ[cs − λ − δ + λfˆ(s)]
ˆ δ) =
σ̂(s, s−ρ
(4.14).
sρ[cs−λ−δ+λfˆ(s)]
This completes the proof of (4.14).

Chapter 5
Method by Garcia (2005),

Exponential, Erlang(2) and
Mixed Exponential Distributions
Exponential Distributed Claims
If the single claim amount distribution is exponential with mean 1/α we have
α
fˆ(s) = , Re(s) > −α (5.1)
α+s
Substituting (5.1) into Lundberg’s fundamental equation (4.11) we get
λ
λ + δ − sc = α . (5.2)
s+α
35
CHAPTER 5. DISTRIBUTIONS OF CLAIMS 36
We also substitute (5.1) into (4.14)
ˆ δ) = s−ρ
σ̂(s, λα
ρs(cs − λ − δ + α+s
ˆ δ) s−ρ
σ̂(s, =
ρscs − ρsλ − ρsδ + ρsλα
α+s
ˆ δ) s−ρ
σ̂(s, = (α+s)ρscs (α+s)ρsλ (α+s)ρsδ ρsλα
α+s
− α+s − α+s + α+s
ˆ δ) (−ρ + s)(α + s)
σ̂(s, =
(α + s)(ρs2 c − ρsλ − ρsδ) + ρsλα
ˆ δ) (−ρ + s)(α + s)
σ̂(s, =
ρs cα − ρsλα − ρsδα + ρs3 c − ρs2 λ − ρs2 δ + ρsλα
2
ˆ δ) (−ρ + s)(α + s)
σ̂(s, = . (5.3)
(ρs)(scα − δα + s2 c − sλ − sδ)
(5.3) will be inverted twice to find an explicit solution for the survival prob-
ability. The first inversion with respect to s (the counterpart of u) is done using
the complex inversion formula for Laplace transforms.
Using the complex inversion formula in the background research, (2.11), we

can find the fist inversion of sigma.
X
σ̂(u, δ) = ˆ δ) at each of its singularities in C}.
{residues of eus σ̂(s, (5.4)
ˆ δ) are at s = ρ, s = 0 and s = R. The residue at s = ρ

The residues of σ̂(s,
is a removable singularity as using the calculation of residues information in the
ˆ δ) = g(z)/h(z) and g and h have zeros of
background research it shows that σ̂(s,
the same order. This means that the residue at z0 = ρ is 0. i.e Res(ρ) = 0.
There are simple poles at s = 0 and s = R.

For s = 0,
g(z0 ) = g(0) = (−ρ + 0)(α + 0) = −ρα 6= 0

h(z0 ) = h(0) = 0
h(z) = (ρs)(scα − δα + s2 c − sλ − sδ)
= ρs2 cα − ρsδα + ρs3 c − ρs2 λ − ρs2 δ
h0 (z) = 2ρscα − ρδα + 3ρcs2 − 2ρsλ − 2ρsδ
h0 (z0 ) = h0 (0) = −ρδα 6= 0.
This follows the theory that if g(z0 ) 6= 0, h(z0 ) = 0 and h0 (z0 ) 6= 0 then it is
a simple pole.
Using (2.12) the residue for a simple pole can be worked out.
g(z0 )
Res(f ; z0 ) =
h0 (z0 )
−ρα
=
−ρδα
1
= . (5.5)
δ
For s = R we have another simple pole
Using the same formula as before we can find the residue at s = R.
g(z0 )
Res(f ; z0 ) =
h0 (z0 )
(−ρ + R)(α + R)
= . (5.6)
2ρRcα − ρδα + 3ρcR2 − 2ρRλ − 2ρRδ
Now σ̂(u, δ) can be worked out with the formula (5.4). We multiply both
residues, (5.5) and (5.6), by eus and then sum them together.
1 (−ρ + R)(α + R)
σ̂(u, δ) = eu×0 + euR
δ 2ρRcα − ρδα + 3ρcR2 − 2ρRλ − 2ρRδ
1 (−ρ + R)(α + R)
σ̂(u, δ) = + euR . (5.7)
The inversion of σ̂(u, δ) is harder, although the first term, 1δ is simple and is
just 1 using (2.10) which has been taken from inversion tables. The second term
can be inverted using formulas and algebra but it has been attempted by Matlab
in this project.
Looking through Garcia’s paper (2005) [1] he works through the complex in-
version theoretically and gets to this final explicit solution for σ(u, t),
∞
e−[(λ+cα)t+αu] X (u + ct)k (λαt)k+1
σ(u, t) = 1 +
α k=0
k!(k + 1)!
∞ j j X ∞
e−[(λ+cα)t+αu] X (u + ct)k (λαt)j+k+1

c 1
− + (. 5.8)
α j=0
λ α k=0
k!(j + k + 1)!
In Garcia (2002) [13] another expression is given which is developed using

Barnes extended hypergeometric function,
e−[(λ+cα)t+αu]
σ(u, t) = 1 + {λαt hypergeom (, [2], (u + ct)λαt)
α
∞ j j j+1 j+1 j+1
X c 1 λ α t
− + hypergeom (, [2 + j], (u + ct)λαt)},
j=0
λ α Γ(2 + j)
this is an easier expression to compute using a software program with this

built-in function.
Direct calculations using Scientific Workplace given by Professor J. Garcia

(for Poisson(1) and Exponential(1)):
200 200 X
200
(1.1t + u)k tk+1 (1.1t + u)k tk+j+1
X X
(−2.1t−u)
σ(u, t) = 1 − e − + 1.1j
k=0
k!(k + 1)! j=0 k=0
k!(k + j + 1)!
200 X
200
(1.1t + u)k tk+j+1
X
+ . (5.9)
j=0 k=0
k!(k + j + 1)!
In (5.9) the values given for the variables are as follows; λ = 1, α = 1 and
c = 1.1. The limit of the sums is 200 for simplicity. (5.9) is the same as (5.8) but
it has been simplified by substituting in these values for the parameters.
Other distributions that have been looked at are the Erlang(2) and the Mixed
Exponential. Both of these have a different Laplace transform and so different
ˆ δ). For both these distributions σ̂(u,
σ̂(u, ˆ δ) was worked out, which is the double
Laplace transform of σ(u, t) and which would then get inverted twice to give ex-
plicit solutions for the survival probabilities.
Erlang(2) Distributed Claims
For the Erlang(2) distribution for the single claim amount the Laplace trans-
form is (Garcia (2005) [1] page 119)
α2
fˆ(s) = , Re(s) > −α (5.10)
(α + s)2
Substituting (5.10) into (4.11) which is Lundberg’s fundamental equation then

we have
α2
δ + λ − cs = λ . (5.11)
(α + s)2
Equation (5.11) has three roots −Q, R and ρ which satisfy the relation,
Q < −α < R < 0 ≤ ρ.
Note that ρ = 0 if and only if δ = 0.
ˆ δ) we substitute (5.10) into (4.14).

To find the equation for σ̂(s,
ˆ δ) = s−ρ
σ̂(s, α2
ρs(cs − λ − δ + λ (α+s) 2)
ˆ δ) = ρ−s
σ̂(s, α2
ρs(λ + δ − cs − λ (α+s) 2)
ˆ δ) = ρ−s
σ̂(s, 2 2 −cs(α+s)2 −λα2
ρs( λ(α+s) +δ(α+s)
(α+s)2
)
ˆ δ) = (ρ − s)(α + s)2
σ̂(s,
ρs(λα2 + λs2 + 2αsλ + δα2 + δs2 + 2αsδ − csα2 − cs3 − 2cs2 α − λα2 )
ˆ δ) = (ρ − s)(α + s)2
σ̂(s, . (5.12)
ρs(λs2 + 2αsλ + δα2 + δs2 + 2αsδ − csα2 − cs3 − 2cs2 α)
The next step with this distribution would be to inverse Laplace transform
(5.12) twice. For details we refer to Garcia (2005) [1] page 119-122.
Mixed Exponential Distributed Claims
If the single claim amount has a mixed exponential claim distribution with
two weights, b and (1 − b), then the Laplace transform of the distribution is (Gar-
cia (2005) [1] page 122)
α β
fˆ(s) = b + (1 − b) . (5.13)
α+s β+s
Without a loss of generality β > α, the Laplace transform is only defined for
s > −α.
Substituting in (5.13) into (4.11) Lundberg’s fundamental equation gives

α β
δ + λ − cs = λ b + (1 − b) . (5.14)
α+s β+s
Then substituting fˆ(s) in (5.13) into (4.14) we have
ˆ δ) = s−ρ
σ̂(s, α β
ρs(cs − λ − δ + λ(b α+s + (1 − b) β+s ))
ˆ δ) = s−ρ
σ̂(s, α β
ρs(cs − λ − δ + λb α+s + λ(1 − b) β+s )
ˆ δ) = s−ρ
σ̂(s,
+ λ(1−b)βα+λ(1−b)βs
2
ρs( csα+cs −λα−λs−δα−δs+λbα
α+s (β+s)(α+s)
)
ˆ δ) = s−ρ
σ̂(s, csαβ+cs2 α+cs2 β+cs3 −λαβ−λαs−λsβ−λs2 −δαβ−δαs−δsβ−δs2 +λbαβ+λbαs+λ(1−b)βα+λ(1−b)βs
ρs( (β+s)(α+s)
)
ˆ δ) = −(ρ − s)(α + s)(β + s) ,

σ̂(s,
h(s)
(5.15)
where
h(s) = ρs(cs3 + s2 [cα + cβ − λ − δ] + s[cαβ − λα − λβ − δα − δβ

+ λbα + λ(1 − b)β] − λαβ − δαβ + λbαβ + λ(1 − b)βα).
Simplifying we have:
h(s)
= cs3 + s2 [cα + cβ − λ − δ] + s[cαβ − λα − λβ − δα − δβ
ρs
+ λbα + λ(1 − b)β] − δαβ.
Chapter 6
Numerical Results for the

Exponential Distribution
Numerical results are given for the calculation of the survival probability σ(u, t)
by two methods for the exponential distribution case.
Matlab was used for all computations.
1) Using the explicit formula (5.8).
i.e
∞
e−[(λ+cα)t+αu] X (u + ct)k (λαt)k+1
σ(u, t) = 1 +
α k=0
k!(k + 1)!
∞ j j X ∞
e−[(λ+cα)t+αu] X (u + ct)k (λαt)j+k+1

c 1
− + .
α j=0
λ α k=0
k!(j + k + 1)!
with parameters α = 1, λ = 1, c = 1.1 and ∞ replaced by 100. Which is the

same as (5.9) but with the sums up to 100 instead of 200 as it wouldn’t work
with 200.
43
CHAPTER 6. NUMERICAL RESULTS 44
i.e
100 100 X
100
(1.1t + u)k tk+1 (1.1t + u)k tk+j+1
X X
(−2.1t−u)
σ(u, t) = 1 − e − + 1.1j
k=0
k!(k + 1)! j=0 k=0
k!(k + j + 1)!
100 X
100
(1.1t + u)k tk+j+1
X
+ . (6.1)
j=0 k=0
k!(k + j + 1)!
Table 6.1: Exponential using Explicit Formula (6.1), for u = 0, 1, 2, ..., 5: c = 1.1:
α = 1: λ = 1
t u=0 u=1 u=2 u=3 u=4 u=5

1 0.536599341 0.761944014 0.880294317 0.940854499 0.971205162 0.9861575
2 0.407136174 0.645431014 0.794327577 0.883673954 0.93559762 0.96499344
3 0.34478902 0.574022178 0.731540865 0.83524227 0.901180318 0.941908999
4 0.306693192 0.5247155 0.683592552 0.794705829 0.869792761 0.919072897
5 0.28040246 0.488107054 0.645580747 0.760489076 0.841637733 0.897340819
6 0.260881492 0.459570548 0.614551659 0.731250087 0.816458475 0.877008112
7 0.245661758 0.436536063 0.588632685 0.705959107 0.793894133 0.85812501
8 0.233373726 0.41744833 0.566579259 0.68383985 0.773591857 0.840635732
9 0.223188948 0.401304257 0.54753032 0.664304143 0.755239232 0.824442102
10 0.214573156 0.387424252 0.530869718 0.646900922 0.738569586 0.80943316
Table 6.2: Exponential using Explicit Formula (6.1), for u = 6, 7, 8, 9, 10: c = 1.1:
α = 1: λ = 1
t u=6 u=7 u=8 u=9 u=10

1 0.993418283 0.996900717 0.998553076 0.999329688 0.999691627
2 0.981274264 0.990123842 0.994856427 0.997351356 0.998650012
3 0.966453611 0.980933066 0.989316732 0.994091214 0.996770312
4 0.950608607 0.970347137 0.982461661 0.989767667 0.994104657
5 0.934635622 0.959059269 0.974740299 0.98463003 0.990767006
6 0.919008321 0.947517374 0.966493819 0.978902364 0.986885328
7 0.90396653 0.936003871 0.957969764 0.972768934 0.982580343
8 0.889620142 0.924693085 0.949343579 0.966375003 0.977957564
9 0.876006659 0.913689365 0.940737664 0.959832447 0.973105567
10 0.863123537 0.90305185 0.932236127 0.953226168 0.968096976
There are eleven different initial reserves, u (0, 1, 2, ..., 10), and ten different
time intervals, t (1, 2, 3, ..., 10).
The results for u = 0, u = 1, u = 2 and u = 10 in Tables (6.1) and (6.2)are

identical to those in Garcia’s paper [1] which just shows that the Matlab program,
Garcia 2.m, was written and executed correctly. I have also included my results
for the extra values of u which I found using the Matlab program Garcia 2.m.
2) By numerical inversion of the Laplace transform σ̂(u, δ) given by (5.7) with

respect to δ using the Gaver-Stehfest method.
i.e
1 (−ρ + R)(α + R)
σ̂(u, δ) = + euR .
Table 6.3: Exponential using Numerical Inversion of (5.7), c = 1.1: α = 1: λ = 1
t u=0(1) u=0(2) u=1(1) u=1(2) u=2(1) u=2(2) u=10(1) u=10(2)

1 0.53667 0.536599341 0.76199 0.761944014 0.88030 0.880294317 0.99972 0.999691627
2 0.40715 0.407136174 0.64546 0.645431014 0.79434 0.794327577 0.99866 0.998650012
3 0.34481 0.344789020 0.57402 0.574022178 0.73156 0.731540865 0.99682 0.996770312
4 0.30668 0.306693192 0.52472 0.524715500 0.68359 0.683592552 0.99411 0.994104657
5 0.28036 0.280402460 0.48809 0.488107054 0.64555 0.645580747 0.99078 0.990767006
6 0.26085 0.260881492 0.45955 0.459570548 0.61455 0.614551659 0.98688 0.986885328
7 0.24554 0.245661758 0.43646 0.436536063 0.58861 0.588632685 0.98260 0.982580343
8 0.23333 0.233373726 0.41742 0.417448330 0.56654 0.566579259 0.97795 0.977957564
9 0.22318 0.223188948 0.40131 0.401304257 0.54752 0.547530320 0.97312 0.973105567
10 0.21457 0.214573156 0.38742 0.387424252 0.53087 0.530869718 0.96810 0.968096976
Table (6.3) used the Matlab program Gaver stehfest Garcia.m [14]. The col-
umn (1) are the results from the numerical inversion and in column (2) the results
presented are some from Tables (6.1) and (6.2) and the explicit formulae for the
exponential case found in the Garcia paper [1].
There are four different initial reserves, u (0, 1, 2 and 10), and ten different
time intervals, t (1, 2, 3, ..., 10).
The roots ρ and R of Lundberg’s fundamental equation (5.2) were found using
the Matlab function fzero.
Chapter 7
Conclusions
We have shown that in the classical risk model it is possible to obtain explicit
solutions for the survival probability in a finite time horizon for three different
claim distributions.
The numerical inversion method used was that of Gaver-Stehfest method in

Davies (2002) [14]. The advantage of this method is that it does not require the
user to use any parameter values like the abscissa of convergence.
The numerical results in Tables (6.1) and (6.2) for the same values for u are
identical to those in the paper by Garcia [1], this is because we used the same ex-
plicit formula and numbers for the variables. The only difference was the amount
the summations summed up to but this seems to have not made a difference.
There is a higher probability of survival when the initial surplus, u, is higher and
when less time, t, has passed.
The numerical results found in Table (6.3) are accurate to results in Garcia
(2005) [1] to at least 3 decimal places and so it can be concluded that they do
agree with the numerical results in the Garcia paper.
Attempts were also made using the Week’s method as implemented by the
NAG Toolbox of Matlab using functions c06lb and c06lc. These programs are
based on Week’s method which is a numerical inversion algorithm. Although the
output did produce numerical results they were not the same as the results in Gar-
cia’s paper (due probably to an unsuccessful choice of three parameters that the
47
CHAPTER 7. CONCLUSIONS 48
method requires the user to input) and so they were not presented in this project.
Further research could include verifying the explicit formulae found by Garcia
(2005) [1] by means of the theoretical complex inversion of the Laplace transform
instead of through a computer program. Also the inversion of σ̂(u, δ) could be
done for the mixed exponential distribution and the Erlang(2) distribution for the
individual claim amounts. This technique could even be used for other particular
claim amount distributions, although this depends on the analytic properties of
the double Laplace transform.
Bibliography
[1] Garcia, J. M. A. (2005) Explicit solutions for survival probabilities in the

classical risk model. ASTIN Bulletin, 35, 1, 113-130.
[2] Dyke, P. P. G. (2001). An Introduction to Laplace Transforms and Fourier

Series. London: Springer.
[3] Dickson, D.C.M. and Hipp, C. (2001) On the time to ruin for Erlang(2)
risk process. Insurance: Mathematics and Economics, 29, 333-344.
[4] Gerber, H.U. and Shiu, E.S.W. (1998). On the time value of ruin. North
American Actuarial Journal, 2, 1, 48-78.
[5] Kass, R., Goovaerts, M., Dhaene, J., and Denuit, M. (2001) Modern Actu-
arial Risk Theory. Kluwer Academic Publishers, 4, 81-106.
[6] Bowers, N.L., Gerber, H.U., Hickman, J.C., Jones, A.D. and Nesbitt, C.J.
(1997) Actuarial Mathematics. The Society of Actuaries.
[7] Ross, S.M. (2007) Introduction to Probability Models (9th ed.). United
States of America: Academic Press.
[8] Jerri, A. J. (1985) Introduction To Integral Equations With Applications.

New York: Marcel Dekker.
[9] Anton, H., Bivens, I., Davis, S. (2005) Calculus (8th ed.). United States of
America: Von Hoffmann Press.
[10] Marsden, J. E. and Hoffman, M. J. (1999) Basic Complex Analysis. W.H.

Freeman: New York.
[11] Silverman, R.A. (1974) Complex Analysis with Applications. Prentice Hall:
United States of America.
49
BIBLIOGRAPHY 50
[12] Howie, J. M. (2004) Complex Analysis. Springer: United States of America.
[13] Garcia, J. M. A. (2002) Explicit solutions for survival probabilities in a finite

time horizon. Presented to the 6th International IME Congress, Lisbon.
http://pascal.iseg.utl.pt/ cemapre/ime2002/index.html (No. 49).
[14] Davies, B. (2002) Integral Transforms and Their Applications (3rd ed.).
Springer. p. 329-330.
[15] Usabel, M. (1999) Calculating multivariate ruin probabilities via Gaver-

Stehfest inversion technique. Insurance: Mathematics and Economics, 25,
2, 133-142.
[16] Cardoso, R. M. R., Waters, H. R. (2005) Calculation of finite time ruin

probabilities for some risk models. Insurance: Mathematics and Economics,
37, 2, 197-215.
[17] Avram, F. and Usabel, M. (2003) Finite time ruin probabilities with one
Laplace inversion. Insurance: Mathematics and Economics, 32, 3, 371-377.
[18] Drekic, S. and Willmot, G. E. (2003) On the Density and Moments of the
Time of Ruin with Exponential Claims. ASTIN Bulletin, 33(1): 11-21.
[19] [Hardcover] Dickson, D. C. M., Hardy, M.R. and Waters, H. R. (2009)

Actuarial Mathematics for Life Contingent Risks. Cambridge University
Press: New York.
[20] Gupta, A. K., Varga, T. (2002) An Introduction to Actuarial Mathematics

(Mathematical Modelling: Theory and Applications). Springer.

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LAPLACE TRANSFORMS FOR

FINDING EXPLICIT SOLUTIONS

Final year project submitted to the Dept. of Mathematics of the

Supervisor: Dr. Athena Makroglou

Second Reader: Ms Lynn Pevy

3 Introduction to Models for Finite Time Ruin 17

4 Laplace Transforms of φ and σ(u, t) 19

6.1 Exponential using Explicit Formula (6.1), for u = 0, 1, 2, ..., 5: c =

An important problem of actuarial risk management is the calculation of the

Insurance is devised to protect against significant financial impact that has

The classical risk model is of the form:

The Harvard system was used for the bibliography.

Notation (using that of Garcia (2005))[1]:

U (t), t ≥ 0: The surplus at time t

Product Rule [9]

The product rule allows a product of functions to be differentiated.

If f and g are differentiable at x, then so is the product fg, and

Chain rule [9]

The chain rule allows a composition of two or more functions to be differen-

If g is differentiable at x and f is differentiable at g(x), then the composition

y = f (g(x)) and u = g(x) then y = f (u) and

Generalized Leibnitz Formula [8]

The Laplace Transform [2]

The Laplace transform is a mapping from points in the time domain, t, to

Theorem 1.2 (Linearity) [2] page 5

L{aF1 (t) + bF2 (t)} = aL{F1 (t)} + bL{F2 (t).} (2.5)

where a and b are arbitrary constants

Derivative property of the Laplace Transform [2]

Suppose a differentiable function F (t) has Laplace Transform f (s), we can

of its derivative F 0 (t) through the following theorem

Theorem 2.2 [2] page 14

Inverse laplace Transform

Convolution [2] page 37

Theorem 3.4 [2] page 38

L{f (t) ∗ g(t)} = fˆ(s)ĝ(s). (2.8)

Laplace Transform of an Integral [2] page 16

Laplace Transform of 1 [2] from table on page 227

Probability Theory [7]

Counting Process [7] page 302

A stochastic process {N (t),t ≥ 0} is said to be a counting process if N (t)

(ii) N (t) is integer valued.

(iii) If s < t, then N (s ≥ N (t).

Poisson Process [7] page 304

The counting process {N (t),t ≥ 0} is said to be a Poisson process having rate

2) The process has independent increments

3) Number of events in any interval of length t, is Poisson distributed with

The Laurent Series [12] page 137

The Laurent Series is a generalized version of a Taylor series in which there

If 0 < r < R, then

Definition of a Residue [11]

Let z0 be an isolated singular point of a function f (z). Then by the residue

is meant the coefficient c−1 in the Laurent expansion

Note that the residues of f (z) at z0 may be zero or nonzero if z0 is a pole or

Complex Inversion Formula [10] page 471

Suppose that F(z) is analytic on C except for a finite number of isolated

Calculation of Residues [10] page 244

Let f be analytic in a deleted neighbourhood of z0 . f has a removable singu-

Introduction to Models for Finite

Consider a company which has a surplus at time t which is

U (t) = u + ct − Y (t), t≥0

If U (t) ≥ 0 for all t then T = ∞.[6]

The probability of ruin is considered as a function of u, ψ(u), and is the prob-

ψ(u) = P r(T < ∞).