Article ID Journal Published Year Pages File Type
5076573 Insurance: Mathematics and Economics 2014 13 Pages PDF
Abstract
For market consistent life insurance liabilities modelled with a multi-state Markov chain, it is of importance to consider the interest and transition rates as stochastic processes, for example in order to consider hedging possibilities of the risks, and for risk measurement. In the literature, this is usually done with an assumption of independence between the interest and transition rates. In this paper, it is shown how to valuate life insurance liabilities using affine processes for modelling dependent interest and transition rates. This approach leads to the introduction of so-called dependent forward rates. We propose a specific model for surrender modelling, and within this model the dependent forward rates are calculated, and the market value and the Solvency II capital requirement are examined for a simple savings contract.
Related Topics
Physical Sciences and Engineering Mathematics Statistics and Probability
Authors
,