Neural calibration of hidden inhomogeneous Markov chains -- Information decompression in life insurance

preprint2022arXivOpen access

Abstract

Markov chains play a key role in a vast number of areas, including life insurance mathematics. Standard actuarial quantities as the premium value can be interpreted as compressed, lossy information about the underlying Markov process. We introduce a method to reconstruct the underlying Markov chain given collective information of a portfolio of contracts. Our neural architecture explainably characterizes the process by explicitly providing one-step transition probabilities. Further, we provide an intrinsic, economic model validation to inspect the quality of the information decompression. Lastly, our methodology is successfully tested for a realistic data set of German term life insurance contracts.

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