Game Theory Term Insurance
Game Theory in Life Insurance
The insurance industry has long been applying game theory to evaluate whether or not individuals are insurable and determine how much premium to charge them based on their apparent needs. This interaction between the consumer and the insurance company can be characterized as a game because not only are they playing against one another but each party is waging on an outcome more beneficial to them. In a traditional life insurance, there are many variables to consider when utilizing game theory to form a strategy as there are investment components along with complex riders. Thus, in order to keep the game relatively simple, this paper will assume the insurance being considered is term life and use game theory to help the consumer decide whether or not to buy the insurance. However, in this particular scenario, the potential buyer will be playing not against the insurance company but rather Mother Nature herself. It will begin by briefly defining game theory and consumer insurance options as well as explore the different strategies game theoretical models. In the end, the paper will also discuss why it might be important to purchase life insurance and the risks involved if not.
Introduction
Before presenting how game theory can help consumers make a decision on whether or not buy life insurance, it is important to understand its framework and some its key elements particularly when payoff depends on the actions taken by another.
Game theory is a method of analyzing situations and studying strategic interactions among game participants, or players, where they choose different actions in an attempt to maximize their returns. It studies decisions that are made in an environment where various players interact. In other words, game theory studies choice of optimal behavior when the costs and benefits of each option are not fixed, but depend upon the choices of other individuals (Browning, 2014).
In every game theory model, there are at
The insurance industry has long been applying game theory to evaluate whether or not individuals are insurable and determine how much premium to charge them based on their apparent needs. This interaction between the consumer and the insurance company can be characterized as a game because not only are they playing against one another but each party is waging on an outcome more beneficial to them. In a traditional life insurance, there are many variables to consider when utilizing game theory to form a strategy as there are investment components along with complex riders. Thus, in order to keep the game relatively simple, this paper will assume the insurance being considered is term life and use game theory to help the consumer decide whether or not to buy the insurance. However, in this particular scenario, the potential buyer will be playing not against the insurance company but rather Mother Nature herself. It will begin by briefly defining game theory and consumer insurance options as well as explore the different strategies game theoretical models. In the end, the paper will also discuss why it might be important to purchase life insurance and the risks involved if not.
Introduction
Before presenting how game theory can help consumers make a decision on whether or not buy life insurance, it is important to understand its framework and some its key elements particularly when payoff depends on the actions taken by another.
Game theory is a method of analyzing situations and studying strategic interactions among game participants, or players, where they choose different actions in an attempt to maximize their returns. It studies decisions that are made in an environment where various players interact. In other words, game theory studies choice of optimal behavior when the costs and benefits of each option are not fixed, but depend upon the choices of other individuals (Browning, 2014).
In every game theory model, there are at
References: Automatic Information. (2014). Term Life Insurance. Retrieved from http://www.automaticinformation.org/term-life-insurance/?lang=en Baye, M.R., Prince, J.T. (2014). Managerial Economics and Business Strategy. New York, NY: McGraw-Hill Irwin Browning. (2014). Game Theory and the Economics of Information. Retrieved from http://www.wiley.com/college/browning/0471389161/pdf/ch14 Tribe. K. (2003). Continental political economy. In T.M. Porter & D. Ross (Eds.), The Cambridge history of science. Cambridge: Cambridge University Press, 154-170. Troutt. (1988). A Purchase Timing Model for Life Insurance Decision Support Systems, Journal of Risk and Insurance, 628-643. Retrieved from http://www.jstor.org/