Valuation Of Conversion Option In Term Life Insurance Under The Dynamic Mortality

As China’s population aging and the implementation of the planned birth policy, the pension issue is getting increasingly serious. In the face of the insufficiency of the old-age security system in our country, how to play the role of commercial insurance is more urgent. In the face of this trend, term life insurance conversion option has recently attracted considerable interest in academia as well as among practitioners. This article selects term life insurance conversion option pricing as the research issue.For insurance company, reasonable product pricing is the basis of insurance product sales, management operating and risk-controlling. This article first explains that for one whose economic situation is not good to buy a term life insurance with conversion options is appropriate. And the value of conversion options mainly is decided by the decline in health condition, and the change of mortality. To price conversion option, the key is:health status analysis, the mortality rate prediction.In view of that there are some defects in the current insurance products pricing method, this paper calculate the pure net premium and option price on the basis of dynamic mortality framework. This paper uses the Lee-Carter model to fit the data of China’s urban population age-specific mortality rates from1990to2005and forecast the mortality rates in the future. This paper abandons the method of singular value decomposition (SVD) which is commonly used, and adopt least-square method which is more simple-operated and fitting China’s population data better.Finally, the value of conversion option is calculated in different age insured, duration of the original term insurance policy, health status, and interest rate.The main purpose of this paper is to propose a method for pricing conversion option for life insurance, which can reflect the actual condition of the future better, and the insurance company could be able to growth healthier. At the same time, we also provide a reference for consumers who want to buy insurance products.