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Sensitivity analysis of the moments of the profit on an Income Protection Policy
Author(s) -
Cordeiro Isabel Maria,
Magalhães Pedro Manuel
Publication year - 2009
Publication title -
applied stochastic models in business and industry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.413
H-Index - 40
eISSN - 1526-4025
pISSN - 1524-1904
DOI - 10.1002/asmb.766
Subject(s) - profit (economics) , economics , actuarial science , sensitivity (control systems) , econometrics , earnings before interest and taxes , mathematics , microeconomics , finance , engineering , electronic engineering
The main purpose of this paper is to perform a sensitivity analysis where we quantify and analyse the effects on the mean of the profit on an Income Protection policy and two risk measures of changing the values of the transition intensities. All the calculations carried out are based on a multiple state model for Income Protection proposed in Continuous Mortality Investigation Committee ( Continuous Mortality Investigation Reports 1991; 12 ). Within this model, we derive a formula for the mean of the profit, which enables to evaluate it more efficiently. In order to calculate the two risk measures we use the numerical algorithms for the calculation of the moments of the profit proposed by Waters ( Insurance: Mathematics and Economics 1990; 9 :101–113). We carry out the sensitivity analysis considering two different situations: in the first situation, we update the premium rates used to calculate the moments of the profit, according to the changes in the values of the transition intensities; in the second one, we do not update the premium rates. Both analyses are of practical interest to insurance companies selling Income Protection policies. Copyright © 2009 John Wiley & Sons, Ltd.