Pricing Whole Life Insurance using Vasicek Interest Rate

Abstract

Policy n-year term life insurance is a kind of insurance firm product with a premium as its price. In this context, the policy is an instrument in a financial market. Mortality and financial market are two important function for pricing premium. The financial market was represented by stochastic interest rate having properties of mean reversion. The model of interest rates were used in this investigation is The Vasicek model. This model were applied to pricing n-year term life insurance through a discount factor which was assumed to follow the pricing zero coupon bond and solved using Affine model, so we obtain the annuity and insurance value to get the annually premium. The result of simulations show that the pricing whole life insurance were sensitive with respect to the changes of interest rate instead of constant rate. Upon the usage of the various parameter values on the Vasicek interest rates, it was found that initial interest rate and the long run equilibrium interest rate were significantly dominating to the fluctuations of interest rate. Keywords: whole life insurance, Vasicek interest rate, zero coupon bond