COMPOUND FRAILTY MODELS FOR INSURANCE UNDERWRITING

Observable risk factors can explain heterogeneity in mortality among assurance policyholders; but modelling the risk profile of a heterogeneous life from unobservable risk factors such as genetics is complex. This limits the application of only reported rating classes adopted for underwritten annuities. Although a number of research has been written on univariate frailty modelling to account for unobserved risks the widely discussed frailty mixture is the gamma. One major drawback of the gamma is that it is time-invariant. The scientific interest of the book is to discuss compound frailty models that account for time-varying heterogeneity. On the other hand grouping insurance policyholders in clusters such as joint annuities imposes statistical dependence between lifetimes. The dependence is a result of an unreported risk factor called the frailty that represents a weighted sum of shared lifestyles on mortality risk of group members. The book further discusses the shared compound frailty approach in valuation of joint annuities to address time-varying heterogeneity effects.