The optimization of insurance contracts on the viatical market

Abstract

We focus on ensuring the financial requirements of a person that has life insurance and needs money because of suffering from a terminal illness that requires costly diagnosis and treatment. On the secondary market of life insurance (the viatical market), companies offer purchase of rights to benefits after the death of the insured. The paper aims to analyse the problem of optimising the life settlement for the insured. We determine the amount of the nominal value of the benefit which the insured intends to sell in such a way so that the number of benefits and premiums maximise the average amount of funds available to the insured. We use various approaches of the insured to risk to find an optimal solution, which also allows taking into consideration the different kinds of human behaviour in risky conditions. The obtained theoretical results are illustrated with examples demonstrating the possibility of their application in practice.