Life Settlements Pricing in Iran’s Secondary Market Using Deterministic, Probabilistic, and Stochastic Approaches

Document Type : Research Paper

Authors

1 Assistant Prof., Personal Insurance Research Group, Insurance Research Institute, Tehran, Iran.

2 Assistant Prof., Department of Economics, Faculty Social Sciences and Economics, Alzahra University, Tehran, Iran.

3 MSc. Student, Department of Economic, Faculty of Social and Economics, Alzahra University, Tehran, Iran.

Abstract

Objective: This article explains different approaches for pricing life settlements in the secondary market to adopt them for pricing the same product in Iran’s insurance industry.
Methods: This is a quantitative study with a focus on life settlements pricing in Iran’s secondary market. It uses deterministic, probabilistic, and stochastic approaches. For this purpose, the Iranian life table, applicable since March 21, 2021, and the French life table, which was previously used by Iran’s insurance companies, were used to calculate the mortality and survival probabilities. Also, these probabilities were adjusted based on the insured's health status and lifestyle. Furthermore, the research findings were compared with the surrender value of the life insurance policy.
Results: The results showed the insurance policy's surrender value to be lower than the price calculated based on the probabilistic and stochastic approaches. It was found to be higher than the price calculated based on the deterministic approach. Therefore, based on probabilistic and stochastic approaches, the exchange of life settlements in the secondary market will benefit the insured. In addition, the price of life insurance policies, based on deterministic and stochastic approaches using the Iranian life table, was lower than the French life table. This was even though the price of these life settlements using the probability approach for the Iranian life table was obtained more than the French life table. Therefore, using the Iranian life table in the pricing of life settlements, based on a probability approach, will benefit the policyholders, and based on a deterministic and stochastic approach; it will be detrimental to them. Furthermore, the life settlements price for Spain is higher than for Iran due to different assumptions.
Conclusion: To increase the penetration of life insurance, insurance companies need to enter new fields, such as secondary markets. The life settlement in the secondary market means the sale of ownership or the transfer of benefits from the insured to the investor. In general, life settlement pricing requires the development of regulations to determine the necessary assumptions, such as the internal rate of return and the adjustment multiplier of the mortality probability.

Keywords

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References

 
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Financial Research Journal
Volume 25, Issue 2
2023
Pages 255-274

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