Stochastic Models for Disability: Approximations and Applications to Sickness and Personal Accident Insurance

25 Pages Posted: 11 Sep 2008

See all articles by Annamaria Olivieri

Annamaria Olivieri

University of Parma - Dipartimento di Scienze Economiche e Aziendali

Ermanno Pitacco

MIB Trieste School of Management

Date Written: September 4, 2008

Abstract

In actuarial practice, the main calculations for insurance covers in the health care area, personal accident and sickness insurance in particular, are commonly based on simplified methods, whose probabilistic assumptions are often not enough clear. In this paper, starting from a rather general structure for the disability process, we show that reasonable approximations lead to the multistate model. Thus, we first show that, since the features of the multistate model allow for several disability degrees, a rigorous modelling for personal accident insurance can be obtained; in this context, risk factors (and hence rating factors) can be represented by an appropriate choice of the transition intensities. Secondly, as the multistate model provides a sound framework for interpreting practical calculation methods used in the health insurance area, we revise some pricing formulae for personal accident and sickness insurance used in practice, so to highlight the main underlying probabilistic assumptions.

Keywords: Multistate models, Markov models, disability annuities, health insurance

JEL Classification: G22

Suggested Citation

Olivieri, Annamaria and Pitacco, Ermanno, Stochastic Models for Disability: Approximations and Applications to Sickness and Personal Accident Insurance (September 4, 2008). Available at SSRN: https://ssrn.com/abstract=1266098 or http://dx.doi.org/10.2139/ssrn.1266098

Annamaria Olivieri (Contact Author)

University of Parma - Dipartimento di Scienze Economiche e Aziendali ( email )

via Kennedy 6
Parma, 43125
Italy

Ermanno Pitacco

MIB Trieste School of Management

Trieste, Trieste 34100
Italy

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