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A linear algebraic method for pricing temporary life annuities and insurance policies |
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| Authors: | P. Date R. Mamon I.C. Wang |
| Affiliation: | a Center for the Analysis of Risk and Optimization Modelling Applications, Department of Mathematical Sciences, Brunel University, Uxbridge, Middlesex UB8 3PH, UK b Department of Statistical and Actuarial Sciences, University of Western Ontario, London, Ontario N6A 5B7, Canada c Department of Public Finance and Taxation, Meiho Institute of Technology, Pingtung, 912, Taiwan |
| Abstract: | 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. |
| Keywords: | Stochastic interest rate models Stochastic mortality models Annuity pricing Insurance premium |
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