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The Thermodynamic Approach to Whole-Life Insurance: A Method for Evaluation of Surrender Risk

Author

Listed:
  • Jir^o Akahori
  • Yuuki Ida
  • Maho Nishida
  • Shuji Tamada

Abstract

We introduce a collective model for life insurance where the heterogeneity of each insured, including the health state, is modeled by a diffusion process. This model is influenced by concepts in statistical mechanics. Using the proposed framework, one can describe the total pay-off as a functional of the diffusion process, which can be used to derive a level premium that evaluates the risk of lapses due tothe so-called adverse selection. Two numerically tractable models are presented to exemplify the flexibility of the proposed framework.

Suggested Citation

  • Jir^o Akahori & Yuuki Ida & Maho Nishida & Shuji Tamada, 2020. "The Thermodynamic Approach to Whole-Life Insurance: A Method for Evaluation of Surrender Risk," Papers 2012.09606, arXiv.org.
    • Handle: RePEc:arx:papers:2012.09606
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    References listed on IDEAS

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