Phase-Type Models in Life Insurance: Fitting and Valuation of Equity-Linked Benefits

Søren Asmussen, Patrick Laub and Hailiang Yang
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Søren Asmussen: Department of Mathematics, Aarhus University, 8000 Aarhus, Denmark
Hailiang Yang: Department of Statistics & Actuarial Science, Hong Kong University, Hong Kong 999077, China

Risks, 2019, vol. 7, issue 1, 1-22

Abstract: Phase-type (PH) distributions are defined as distributions of lifetimes of finite continuous-time Markov processes. Their traditional applications are in queueing, insurance risk, and reliability, but more recently, also in finance and, though to a lesser extent, to life and health insurance. The advantage is that PH distributions form a dense class and that problems having explicit solutions for exponential distributions typically become computationally tractable under PH assumptions. In the first part of this paper, fitting of PH distributions to human lifetimes is considered. The class of generalized Coxian distributions is given special attention. In part, some new software is developed. In the second part, pricing of life insurance products such as guaranteed minimum death benefit and high-water benefit is treated for the case where the lifetime distribution is approximated by a PH distribution and the underlying asset price process is described by a jump diffusion with PH jumps. The expressions are typically explicit in terms of matrix-exponentials involving two matrices closely related to the Wiener-Hopf factorization, for which recently, a Lévy process version has been developed for a PH horizon. The computational power of the method of the approach is illustrated via a number of numerical examples.

Keywords: generalized Coxian distribution; EM algorithm, guaranteed minimum death benefit; high-water benefit; jump diffusion, matrix-analytic methods; reserves; Wiener-Hopf factorization (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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