A linear algebraic method for pricing temporary life annuities and insurance policies

We recast the valuation of annuities and life insurance contracts under mortality and interest rates, both of which are stochastic, as a problem of solving a system of linear equations with random perturbations. A sequence of uniform approximations is developed which allows for fast and accurate com...

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Bibliographic Details
Published in:Insurance, mathematics & economics mathematics & economics, 2010-08, Vol.47 (1), p.98-104
Main Authors: Date, P., Mamon, R., Jalen, L., Wang, I.C.
Format: Article
Language:English
Subjects:
Algebra
Annuities
Annuity pricing
Approximation
Insurance
Insurance policies
Insurance premium
Interest rates
Life insurance
Mathematical finance
Monte Carlo simulation
Mortality
Stochastic interest rate models
Stochastic interest rate models Stochastic mortality models Annuity pricing Insurance premium
Stochastic models
Stochastic mortality models
Studies
Valuation
Value theory
Citations: Items that this one cites
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Summary:We recast the valuation of annuities and life insurance contracts under mortality and interest rates, both of which are stochastic, as a problem of solving a system of linear equations with random perturbations. A sequence of uniform approximations is developed which allows for fast and accurate computation of expected values. Our reformulation of the valuation problem provides a general framework which can be employed to find insurance premiums and annuity values covering a wide class of stochastic models for mortality and interest rate processes. The proposed approach provides a computationally efficient alternative to Monte Carlo based valuation in pricing mortality-linked contingent claims.
ISSN:0167-6687
1873-5959
DOI:10.1016/j.insmatheco.2010.04.004