Can frailty models improve actuarial calculations in health insurance?

Can frailty models improve actuarial calculations in health insurance?

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Speaker(s): Ermanno Pitacco (University of Trieste)

Multi-state models, combined with Markov (and semi-Markov) hypotheses, have provided, since the seminal contributions by M. H. Amsler and J. Hoem, a unifying approach to actuarial calculations in the framework of insurances of the person, i.e. life insurance, life annuities, several types of health insurance (e.g., disability and long-term care insurance covers).

Heterogeneity in mortality, due to unobservable risk factors, was first formalized in terms of “frailty” in the pioneering paper by R. E. Beard, paving the way to innovative perspectives in demography as well as in life insurance actuarial mathematics.

The present paper aims at exploring possible applications of the frailty concept and related stochastic assumptions in the context of health insurance (disability annuities and long-term care annuities, in particular), hence generalizing the probabilistic structure of the multi-state models. A more realistic setting should actually allow for individual random frailty, affecting disablement, recovery, mortality. Special attention will be placed on the volatility of the benefits paid by the insurer (and hence on its risk profile), assessed in this more realistic framework.

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