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

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  • 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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    1. Laura Ballotta & Ernst Eberlein & Thorsten Schmidt & Raghid Zeineddine, 2020. "Variable annuities in a Lévy-based hybrid model with surrender risk," Quantitative Finance, Taylor & Francis Journals, vol. 20(5), pages 867-886, May.
    2. Nadine Gatzert & Gudrun Hoermann & Hato Schmeiser, 2009. "The Impact of the Secondary Market on Life Insurers’ Surrender Profits," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(4), pages 887-908, December.
    3. Bruce Jones, 1998. "A Model for Analyzing the Impact of Selective Lapsation on Mortality," North American Actuarial Journal, Taylor & Francis Journals, vol. 2(1), pages 79-86.
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    5. Tomas Philipson & John Cawley, 1999. "An Empirical Examination of Information Barriers to Trade in Insurance," American Economic Review, American Economic Association, vol. 89(4), pages 827-846, September.
    6. de Meza, David & Webb, David C, 2001. "Advantageous Selection in Insurance Markets," RAND Journal of Economics, The RAND Corporation, vol. 32(2), pages 249-262, Summer.
    7. Stéphane Loisel, 2011. "Surrender risk and correlation crises," Post-Print hal-00671919, HAL.
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