Extended risk classification in insurance industry

Recently extended risk classification has become an important issue in life insurance and annuity markets. Using various risk factors, one can construct various risk classes. This enables insurers to provide more equitable life insurance and annuity benefits for individuals in different risk classes and to manage mortality/longevity risk more efficiently. This article discusses the development of a mortality model that reflects the impact of various risk factors on mortality. The model uses Markov process combined with generalized linear models. The model is used to illustrate how the various risk factors influence actuarial present values of life insurance and annuity benefits.