Pricing Critical Illness Insurance Premiums Using Multiple State Continous Markov Chain Model

Abstract

Critical Illness Insurance is an insurance product with a lump sum benefit or cash payment if the policyholder is diagnosed with critical illness in an insurance contract. The health state change process can be observed and modeled by a multi-state Markov Chain with a time-continuous parameter. In this article, we will illustrate how the mathematics of Markov Chain can be used to develop a model of state change in critical illness in the case of a cancer patient. Health state changes process in critical illness modeled by four states Markov chain. Using transition probability which is based on transition intensity of continuous Markov chain. We will estimate the transition intensity and used it in a differential equation of transition probability. The application of Markov chain model will be used to estimate the value of the premiums in some of critical illness insurance benefit model. The premiums value will be shown in the table in section five.