Decreasing Classification Risk in Term Life Insurance Considering the Interest rate and Period of Contract

Term life insurance is a type of life insurance policy that provides coverage for a certain period of time. If the insured dies during the time period specified in the policy and the policy is active, a death benefit will be paid. One of the basic problem in insurance company is that insurers can not classify high level risk individual from low level risk individual and cannot offer different premium to each individual. Therefore, the aim of this study was to show how insurers can decrease risk classification and increase demand of low level individual for insurance. We used Mahdavi’s model and it was expanded with contract duration, interest rate and individual’s age parameters. We found that if contract duration or interest rate increases, demand for insurance and risk classification also increase. However, if age of the individual or cost of claim increases, demand for insurance decreases. In additional, when cost of claim goes up, risk classification declines.

Keywords:

Term life insurance , Risk classification , adverce selecion , Risk aversion , Conventional theory , Interest rate