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**Pricing life insurance under stochastic mortality via the instantaneous Sharpe ratio.**
*(English)*
Zbl 1152.91612

Summary: We develop a pricing rule for life insurance under stochastic mortality in an incomplete market by assuming that the insurance company requires compensation for its risk in the form of a pre-specified instantaneous Sharpe ratio. Our valuation formula satisfies a number of desirable properties, many of which it shares with the standard deviation premium principle. The major result of the paper is that the price per contract solves a linear partial differential equation as the number of contracts approaches infinity. One can represent the limiting price as an expectation with respect to an equivalent martingale measure. Via this representation, one can interpret the instantaneous Sharpe ratio as a market price of mortality risk. Another important result is that if the hazard rate is stochastic, then the risk-adjusted premium is greater than the net premium, even as the number of contracts approaches infinity. Thus, the price reflects the fact that systematic mortality risk cannot be eliminated by selling more life insurance policies. We present a numerical example to illustrate our results, along with the corresponding algorithms.

### MSC:

91B30 | Risk theory, insurance (MSC2010) |

91B70 | Stochastic models in economics |

### Keywords:

stochastic mortality; pricing; life insurance; Sharpe ratio; nonlinear partial differential equations; market price of risk; equivalent martingale measures
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\textit{V. R. Young}, Insur. Math. Econ. 42, No. 2, 691--703 (2008; Zbl 1152.91612)

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