Essay Game Theory Term Insurance

1927 Words Jun 30th, 2015 8 Pages
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
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a) If the buyer decides to ‘Insure’ but ‘Lives’ through the term of the insurance, he or she will not get back the premiums paid. = (-1, 0)

b) If the buyer decides to ‘Not Insure’ and ‘Dies’, his or her survivors will not receive any compensation (not factoring cash and assets from legal documents such as Will and Testament) = (-1, 0)
Lastly, if the consumer elects not to purchase life insurance, there would be no adverse effects as if there was no decision made in the first place. However, this would be considered risky for the consumer especially if there are no other avenues of wealth to provide for his survivors or perhaps eliminate any outstanding financial debt to society if there are no family involved.
Note that in any of that strategies aforementioned, Mother Nature remains to be zero for the fact it has nothing to gain whether the consumer lives or dies. On the other hand, if Mother Nature chooses ‘Die’ then the most appropriate strategy for the consumer would be to insure. Because of this, there is no dominant strategy for either party. A dominant strategy is a strategy that results in the highest payoff to a player regardless of the opponent’s action (Baye, 2014).
Is It Truly Worth Buying Life Insurance?
Now let’s apply the above model in a dollar perspective. Suppose a prospective buyer is considering to buy a term life insurance with a face amount of $100,000

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