Computational formula for the impact of stochastic dependence on the insurance premium

Abstract

Standard actuarial theory of multiple life insurance traditionally postulates independence for the remaining lifetimes mainly due to computational convenience rather than realism. In this paper, we propose a general common shock model for modelling dependent coupled lives and apply it to a life insurance model. Under the model, we derive the computational formula for the impact of stochastic dependence on the pricings of insurance policies involving multiple lives which are subject to common shocks.Standard actuarial theory of multiple life insurance traditionally postulates independence for the remaining lifetimes mainly due to computational convenience rather than realism. In this paper, we propose a general common shock model for modelling dependent coupled lives and apply it to a life insurance model. Under the model, we derive the computational formula for the impact of stochastic dependence on the pricings of insurance policies involving multiple lives which are subject to common shocks.