A subjective approach to risk measurement in life insurance

Several aspects of the life insurance pricing process depend on the subjective attitude of both the agents, insurer and insured. The insurer chooses the population sector, that may be interested in the offered protection and the prevailing interest between coverage and investment. On one side, prudence has to characterize the management due to the social role and has to be inserted explicitly in the product construction. On the other side, the insured clarifies himself the degree of risk aversion and the corresponding price he attributes to the several kinds of risks. A bargaining process and a trade-off procedure between risk and return have to be followed when defining bonus and guaranteed thresholds. The development of information acquisition is very difficult and imprecise, but it is fundamental to build the agents’ knowledge of the market and population conditions. The subjective approach has to characterize price setting, guarantees definition and information acquisition. This approach allows the agent to verify the behavioral link with the market scenarios and the solution will be set in a dynamic framework, due to the long-term nature of life insurance policies.