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Pricing Life Contingencies Linked to Impaired Life Expectancies Using Intuitionistic Fuzzy Parameters

Author

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  • Jorge de Andrés-Sánchez

    (Social and Business Research Lab, Universitat Rovira i Virgili, Campus de Bellissens, 43204 Reus, Spain)

Abstract

Several life contingency agreements are based on the assumption that policyholders have impaired life expectancy attributable to factors, such as lifestyle, social class, or preexisting health issues. Quantifying two crucial variables, augmented death probabilities and the discount rate of projected cash flows, is essential for pricing such agreements. Information regarding the correct values of these parameters is subject to vagueness and imprecision, which further intensifies if impairments must be considered. This study proposes modelling mortality and interest rates using a generalization of fuzzy numbers (FNs), known as intuitionistic fuzzy numbers (IFNs). Consequently, this paper extends the literature on life contingency pricing with fuzzy parameters, where uncertainty in variables, such as interest rates and death probabilities, is modelled using FNs. While FNs introduce epistemic uncertainty, the use of IFNs adds bipolarity to the analysis by incorporating both positive and negative information regarding actuarial variables. Our analysis focuses on two agreements involving policyholders with impaired life expectancies: determining the annuity payment in a substandard annuity and pricing a life settlement over a whole life insurance policy. In particular, we emphasize modelling interest rates and survival probabilities using triangular intuitionistic fuzzy numbers (TIFNs) owing to their ease of interpretation and implementation.

Suggested Citation

  • Jorge de Andrés-Sánchez, 2024. "Pricing Life Contingencies Linked to Impaired Life Expectancies Using Intuitionistic Fuzzy Parameters," Risks, MDPI, vol. 12(2), pages 1-33, February.
    • Handle: RePEc:gam:jrisks:v:12:y:2024:i:2:p:29-:d:1332072
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    References listed on IDEAS

    as
    1. Meyricke, Ramona & Sherris, Michael, 2013. "The determinants of mortality heterogeneity and implications for pricing annuities," Insurance: Mathematics and Economics, Elsevier, vol. 53(2), pages 379-387.
    2. Yonghong Shen & Wei Chen, 2012. "Multivariate Extension Principle and Algebraic Operations of Intuitionistic Fuzzy Sets," Journal of Applied Mathematics, Hindawi, vol. 2012, pages 1-18, October.
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