Jingdan (Jessica) Li

A multi-state model for pricing critical illness insurance products

Due to increasing cases of cancer and other severe illnesses, there is a great demand of critical illness insurance products. This project introduces a Markovian multi-state model based on popular critical illness plans to describe the policyholder’s health conditions over time, which includes becoming ill of certain dread diseases such as cancer, stroke and heart attack. Critical illness insurance products with life insurance or other optional riders are considered. Following the idea of Baione and Levantesi (Insurance: Mathematics and Economics, 58: 174-184, 2014), we focus on the method of modelling mortality rates, estimating transition probabilities with Canadian prevalence rates and incidence rates of covered illnesses, and calculating premium rates based on the multi-state model. The comparison of transition intensities with various mortality models and premium rates for critical illness policies under several graduation approaches are also illustrated.