The Uncertain Lapse and Mortality Model

Reinsurance deals have been briefly introduced in Section 5.6. In this chapter, we present the uncertain lapse and mortality model (ULMM) for the valuation of such contracts. The price of those long-term deals depends on mortality rates and lapse rates. One cannot hedge against the future movements of these non-financial variables. The ULMM provides a worst-case price, under the assumption that the mortality and lapse rates stay within a certain range before the maturity of the deal.