Pricing Life Insurance: Combining Economic, Financial, and Actuarial Approaches
This paper examines the pricing of term life insurance based on the economic approach of profit maximization, and incorporating the financial approach of stochastic interest rates, investment returns, and the insolvency option, while also including actuarial modeling of mortality risk. Optimal price (premium) is obtained by optimizing a stochastic objective function based on maximizing the expected net present value (NPV) of insurer profit. Expected claim payments are calculated on the basis of the Cox, Ingersoll, Ross (1985) financial valuation model. Our work analyzes numerically the influence of various parameters on optimal price, optimal expected NPV of insurer profit, and the insolvency put option value. We examine several parameters including the speed of adjustment in the mean reverting prices, the initial value of the short run equilibrium interest rate, the volatility of interest rate, the volatility of asset portfolio, the long run equilibrium interest rate, and the age of the insured. Findings demonstrate that optimal prices generally are most sensitive to changes in the long run equilibrium interest rate. Factors that have a strong influence on the price of the insolvency option include the age of the insured, volatility of interest rate, and volatility of the asset portfolio, especially at larger values of these parameters.
Volume (Year): 27 (2004)
Issue (Month): 2 ()
|Contact details of provider:|| |
When requesting a correction, please mention this item's handle: RePEc:wri:journl:v:27:y:2004:i:2:p:134-159. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (James Barrese)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.