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Valuation of a multistate life insurance contract with random benefits

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  • Persson, Svein-Arne

Abstract

We 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.

Suggested Citation

  • Persson, Svein-Arne, 1993. "Valuation of a multistate life insurance contract with random benefits," Scandinavian Journal of Management, Elsevier, vol. 9(Supplemen), pages 73-86.
    • Handle: RePEc:eee:scaman:v:9:y:1993:i:supplement1:p:s73-s86
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    Cited by:

    1. Imad Chahboun & Nathaniel Hoover, 2019. "Variable Annuities: Underlying Risks and Sensitivities," Supervisory Research and Analysis Working Papers RPA 19-1, Federal Reserve Bank of Boston.
    2. Virginia R. Young, 2004. "Pricing In An Incomplete Market With An Affine Term Structure," Mathematical Finance, Wiley Blackwell, vol. 14(3), pages 359-381, July.
    3. 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.
    4. 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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