Hierarchical markov model in life insurance and social benefit schemes

Research output: Contribution to journalArticle

Abstract

We explored the effect of the jump-diffusion process on a social benefit scheme consisting of life insurance, unemployment/disability benefits, and retirement benefits. To do so, we used a four-state Markov chain with multiple decrements. Assuming independent state-wise intensities taking the form of a jump-diffusion process and deterministic interest rates, we evaluated the prospective reserves for this scheme in which the individual is employed at inception. We then numerically demonstrated the state of the reserves for the scheme under jump-diffusion and non-jump-diffusion settings. By decomposing the reserve equation into five components, our numerical illustration indicated that an extension of the retirement age has a spillover effect that would increase government expenses for other social insurance programs. We also conducted sensitivity analyses and examined the total-reserves components by changing the relevant parameters of the transition intensities, which are the average jump-size parameter, average jump frequency, and diffusion parameters of the chosen states, with figures provided. Our computation revealed that the total reserve is most sensitive to changes in average jump frequency.

Original languageEnglish
Article number63
JournalRisks
Volume6
Issue number3
DOIs
Publication statusPublished - 1 Sep 2018

Fingerprint

Social benefits
Markov model
Life insurance
Jump
Jump-diffusion process
Disability benefits
Spillover effects
Retirement age
Retirement
Interest rates
Markov chain
Expenses
Social insurance
Unemployment
Jump diffusion
Government

Keywords

  • Hierarchical Markov process
  • Jump-diffusion process
  • Life insurance
  • Retirement benefits
  • Unemployment/disability benefits

ASJC Scopus subject areas

  • Accounting
  • Strategy and Management
  • Economics, Econometrics and Finance (miscellaneous)

Cite this

Hierarchical markov model in life insurance and social benefit schemes. / Jang, Jiwook; Mohd Ramli, Siti Norafidah.

In: Risks, Vol. 6, No. 3, 63, 01.09.2018.

Research output: Contribution to journalArticle

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