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

Jiro Akahori, Yuuki Ida, Maho Nishida and Shuji Tamada

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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.

Date: 2020-12
New Economics Papers: this item is included in nep-ias and nep-rmg
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