The use of phase-type models for disability insurance calculations

Amin Hassan Zadeh, Bruce L. Jones and David A. Stanford

Scandinavian Actuarial Journal, 2014, vol. 2014, issue 8, 714-728

Abstract: This paper explores the use of phase-type models in actuarial calculations for disability insurance. We demonstrate that the changes in status of disability insureds can be appropriately captured by a phase-type model. Our model represents the aging process as the passage through a number of phases of decreasing vitality. When disabled, individuals additionally pass through several stages that represent duration of disability. Recovery and mortality rates from the earlier stages are greater than those in later stages. Using such a model, explicit and easily calculable expressions are obtained for relevant probabilities and actuarial present values. This facilitates the calculation of premiums and reserves.

Date: 2014
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DOI: 10.1080/03461238.2012.761645

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