Valuation of a multistate life insurance contract with random benefits
AbstractWe present a model where the value of the life insurance benefit is random. The policy is at each point in time assumed to be in one of a finite number of states and the evolution of the policy through time is modelled by a time-continuous, non-homogeneous Markov chain. The insurance period of a life insurance contract is long compared to the contract period of a typical financial contingent claim. The value of the insurance benefit is assumed to follow a geometric Gaussian process which has certain appealing properties when dealing with such long contract periods. We use the martingale arbitrage pricing theory to derive the market value of a quite general life insurance policy and deduce the corresponding Thiele's differential equation.
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Bibliographic InfoArticle provided by Elsevier in its journal Scandinavian Journal of Management.
Volume (Year): 9 (1993)
Issue (Month): Supplement 1 ()
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- Aase Nielsen, J. & Sandmann, Klaus, 1995.
"Equity-linked life insurance: A model with stochastic interest rates,"
Insurance: Mathematics and Economics,
Elsevier, vol. 16(3), pages 225-253, July.
- Nielsen, J. Aase & Klaus Sandmann, 1995. "Equity-linked life insurance - a model with stochastic interest rates," Discussion Paper Serie B 291, University of Bonn, Germany, revised Mar 1995.
- Coleman, Thomas F. & Li, Yuying & Patron, Maria-Cristina, 2006. "Hedging guarantees in variable annuities under both equity and interest rate risks," Insurance: Mathematics and Economics, Elsevier, vol. 38(2), pages 215-228, April.
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