Fair valuations of insurance policies under multiple risk factors: a flexible lattice approach (Q6556605)

To evaluate the fair value of insurance contracts, the paper suggests a flexible lattice model that includes both financial and actuarial risk factors. This model is specifically designed for contracts that meet the need for protection in old age and provide new investment instruments that are linked to an individual's lifetime. A detailed description of the discretizations of the processes involved in the evaluation algorithms is provided after the framework is introduced. Starting with the discretizations proposed for the interest rate and mortality rate processes, a preliminary bivariate model is generated. Then, a trivariate tree is provided to evaluate insurance products linked to funds. Several applications and numerical examples display the potential use and the practical importance of the methodology proposed throughout the paper.