Abstract:
This thesis seeks to apply a model for pricing insurance policies. Some insurance
companies are facing increasing financial losses because of large claims, which are not
equivalent to the premiums. Continuous-time Markov chain has been used to price
insurance policies, at the beginning elementary theory of continuous-time Markov
chain is introduced and some basic properties of Markov chain, transition proba
bilities, force of intensity. Next part of thesis, the reader is introduced to some
application of Kolmogorov differential equation for a multi-state model as they are
widely used in actuarial science because they provide a convenient way for represent
ing changes in people’s status. The multi-state models have been assumed to satisfy
the Markov properties. The continuous-time Markov chain have been used in calcu
lating the transition intensities and transition probabilities have been calculated using
Kolmogorov differential equation. Transition intensities, transition probabilities are
used to calculate the expected present values of benefit, the annuities of death ben
efit and the premiums as applied to insurance products for Sanlam. Results reveal
that the premiums and the benefits of transition between disability state to death
are highest compared to the others. The conclusion is increasing premiums leads to
more benefits which is in line with real reality
