Cash flows with policyholder behaviour in a joint life insurance setup

Specialeforsvar: Sune Arnskjær Hastrup

Titel: Cash flows with policyholder behaviour in a joint life insurance setup

Resume: The Solvency II legislation requires that policyholder behaviour options is taken into account when evaluating liabilities. The main goal of this thesis is to establish a framework from which it is possible to evaluate the cash flows of joint life insurance
policies while accounting for policyholder behaviour options. Of main focus is the policyholder options of free policy and surrender, or the so-called 7-state model, where the health and behaviour of the insured is modelled. This model is expanded to fit a joint life setup in first a Markov and then a semi-Markov setup. From this model we are allowed to model divorce as a policyholder behaviour option, meaning that the insured changes his life insurance products as a consequence of divorce or death of the co-insured spouse. Another policyholder behaviour option, premature retirement, is also considered
briefly, as it follows directly from the theory that will be established, however only in a single-life setup. We find that it is fully possible to model the cash flows in a Markov setup. The semi-Markov setup, however, yields some complications but correct cash flows can be found under certain conditions. When the model assumptions become too complicated, simulation is preferred rather than approximating solutions to integro-differential equations.

Vejleder: Jesper Lund Pedersen
Censor: Kenneth Bruhn Kristiansen