Optimal choice of coverage in a disability product

Specialeforsvar ved Andreas Voigt Dalgaard

Titel: Optimal choice of coverage in a disability product

Abstract: Imagine a consumer who wants to buy a disability product. The consumer has to choose how much of her salary she wants to pay as premium and how much she would like in return as benefit if she becomes disabled. This thesis will answer the question: What is the optimal disability coverage and premium for the consumer? This question is solved by applying three different methods found in control theory. The three methods are the static, the dynamic and the dynamic-static method. This thesis' contribution to already existing literature is the dynamic-static optimization, which is a dynamic optimization that shifts to a static optimization at a stochastic point in time. This dynamic-static decision pattern is relevant since it seems to describe the decisions that real customers face well. Supplied with numerical examples and references to existing literature, this thesis will derive the optimal static, dynamic and dynamic-static premium and coverage. At last, after all the calculations we will be able to conclude that we have found a way of solving a dynamic-static optimization problem in a two-state Markov chain

Vejledere:  Mogens Steffensen / Peter Lauritsen
Censor:      Jesper Olesen, Danica Pension