Application of the phase-type mortality law to life contingencies and risk management

Joseph H.T. Kim, Taehan Bae, Soyeun Kim

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

The class of phase-type distributions has recently gained much popularity in insurance applications due to its mathematical tractability and denseness in the class of distributions defined on positive real line. In this paper, we show how to use the phase-type mortality law as an efficient risk management tool for various life insurance applications. In particular, pure premiums, benefit reserves, and risk-loaded premiums using CTE for standard life insurance products are shown to be available in analytic forms, leading to efficient computation and straightforward implementation. A way to explicitly determine provisions for adverse deviation for interest rate and mortality is also proposed. Furthermore, we show how the interest rate risk embedded in life insurance portfolios can be analyzed via interest rate sensitivity index and diversification index which are constructed based on the decomposition of portfolio variance. We also consider the applicability of phase-type mortality law under a few non-flat term structures of interest rate. Lastly, we explore how other properties of phase-type distributions may be applied to joint-life products as well as subgroup risk ordering and pricing within a given pool of insureds.

Original languageEnglish
Pages (from-to)184-212
Number of pages29
JournalApplied Stochastic Models in Business and Industry
Volume33
Issue number2
DOIs
Publication statusPublished - 2017 Mar 1

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Insurance
Risk Management
Risk management
Mortality
Interest Rates
Phase-type Distribution
Term Structure of Interest Rates
Risk Premium
Tractability
Diversification
Real Line
Pricing
Deviation
Subgroup
Decomposition
Decompose
Life
Contingency
Life insurance
Costs

All Science Journal Classification (ASJC) codes

  • Modelling and Simulation
  • Business, Management and Accounting(all)
  • Management Science and Operations Research

Cite this

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Application of the phase-type mortality law to life contingencies and risk management. / Kim, Joseph H.T.; Bae, Taehan; Kim, Soyeun.

In: Applied Stochastic Models in Business and Industry, Vol. 33, No. 2, 01.03.2017, p. 184-212.

Research output: Contribution to journalArticle

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