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Multi-state models for evaluating conversion options in life insurance

Author

Listed:
  • Guglielmo D'Amico
  • Montserrat Guillen
  • Raimondo Manca
  • Filippo Petroni

Abstract

In this paper we propose a multi-state model for the evaluation of the conversion option contract. The multi-state model is based on age-indexed semi-Markov chains that are able to reproduce many important aspects that influence the valuation of the option such as the duration problem, the time non-homogeneity and the ageing effect. The value of the conversion option is evaluated after the formal description of this contract.

Suggested Citation

  • Guglielmo D'Amico & Montserrat Guillen & Raimondo Manca & Filippo Petroni, 2017. "Multi-state models for evaluating conversion options in life insurance," Papers 1707.01028, arXiv.org.
    • Handle: RePEc:arx:papers:1707.01028
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    References listed on IDEAS

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    1. Guglielmo D'Amico & Filippo Petroni, 2012. "Weighted-indexed semi-Markov models for modeling financial returns," Papers 1205.2551, arXiv.org, revised Jun 2012.
    2. Maegebier, Alexander, 2013. "Valuation and risk assessment of disability insurance using a discrete time trivariate Markov renewal reward process," Insurance: Mathematics and Economics, Elsevier, vol. 53(3), pages 802-811.
    3. Guglielmo D'Amico & Filippo Petroni, 2011. "A semi-Markov model with memory for price changes," Papers 1109.4259, arXiv.org, revised Dec 2011.
    4. Kwon, Hyuk-Sung & Jones, Bruce L., 2006. "The impact of the determinants of mortality on life insurance and annuities," Insurance: Mathematics and Economics, Elsevier, vol. 38(2), pages 271-288, April.
    5. X. Lin & Xiaoming Liu, 2007. "Markov Aging Process and Phase-Type Law of Mortality," North American Actuarial Journal, Taylor & Francis Journals, vol. 11(4), pages 92-109.
    6. Nordahl, Helge A., 2008. "Valuation of life insurance surrender and exchange options," Insurance: Mathematics and Economics, Elsevier, vol. 42(3), pages 909-919, June.
    7. Fredrik Stenberg & Raimondo Manca & Dmitrii Silvestrov, 2007. "An Algorithmic Approach to Discrete Time Non-homogeneous Backward Semi-Markov Reward Processes with an Application to Disability Insurance," Methodology and Computing in Applied Probability, Springer, vol. 9(4), pages 497-519, December.
    8. Guglielmo D’Amico & Jacques Janssen & Raimondo Manca, 2011. "Discrete Time Non-Homogeneous Semi-Markov Reliability Transition Credit Risk Models and the Default Distribution Functions," Computational Economics, Springer;Society for Computational Economics, vol. 38(4), pages 465-481, November.
    9. Kwon, Hyuk-Sung & Jones, Bruce L., 2008. "Applications of a multi-state risk factor/mortality model in life insurance," Insurance: Mathematics and Economics, Elsevier, vol. 43(3), pages 394-402, December.
    10. Su, Karen C., 2010. "The conversion option in life insurance," Insurance: Mathematics and Economics, Elsevier, vol. 46(3), pages 437-442, June.
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