Abstract
We study canonical consumption-savings problems of an individual involving uninsurable biometric risk. These problems are important in many applications from insurance economics and actuarial science. Since biometric risk is uninsurable, closed-form solutions do not exist and thus the problems must be approached by numerical methods. We propose a powerful approach where the solution is obtained by optimizing over a parametrized family of consumption strategies. In settings with mortality risk, critical illness risk, and habit formation, our solution method outperforms the well-established finite-difference approach both in run time and in precision. Our method also delivers a precision measure and closed-form representations of the optimal controls.
Originalsprog | Engelsk |
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Tidsskrift | Scandinavian Actuarial Journal |
Udgave nummer | 4 |
Sider (fra-til) | 307-327 |
Antal sider | 21 |
ISSN | 0346-1238 |
DOI | |
Status | Udgivet - maj 2022 |
Bibliografisk note
Published online: 19 Aug 2021.Emneord
- Dynamic programming
- Life-cycle models
- Biometric risk
- Insurance
- Habit formation