Abstract
In the “life settlements market” where life insurance products are distributed, prices are determined by market forces, the fairness of which is open to question. The objectives of this paper is presenting an exchange model between morality risk and capital market risk to clarify the price structure and calculate fair prices of life insurance products.
Prices of insurance products are determined in consideration of both actuarial statistics in the insurance market and investment information in the capital market. In order to equalize the price calculation basis in both markets, the calculation uses not a decision theoretic approach adding a safety factor to the experienced mortality rate in actuarial statistics but a stochastic approach using Monte Carlo simulation. The calculation result shows that current market prices are disadvantageous to policyholders and life settlement companies gain excessive profits, indicating a possibility to provide higher returns to policyholders when interest rates are low.
