Pricing Mortgage Insurance Under Stochastic Interest Rate Models

Housing problem is one of the major problems that we are confronting current-ly.’Measures to rein in property prices’have not been mentioned in the Central Economic Work Conference for two consecutive years,the trend of de-administration in Chinese property market has emerged. In spite of big stimulus——interest rate cuts, RRR cuts and cancel of house purchase restriction, housing prices have con-tinued to decline since May of 2014. The investment in property market is reducing and the property market is still in recession.’The Twelfth Five-Year’Plan of nation’s financial reform clearly proposed that’to steadily promote the reform of liberalizing interest rate’. Liberalization of interest rate is the propulsion to deepen reform our nation’s banking sector and capital market, which can help reasonably accelerate the competition among finan-cial sectors, and promote financial institutions to adjust their business structure as well as innovate financial products and tools. Otherwise, there are lots of risks that cannot be ignored when we promote the process of liberalizing interest rate.Mortgage insurance,which is related to interest rate and housing has got great development since it was introduced. However, irrational pricing has become promi-nent due to the nation’s less of experience in the insurance market as well as the absence of government. Especially with the advance of liberalizing the interest rate and fluctuations of housing prices, the role of mortgage insurance should be strengthened more, and within this process insurance pricing and scientific ratio-nalization should be reconsidered as well.By comparing multiple stochastic interest rate models and analyzing the distri- bution characteristics of these models,to build models in three ways to pay for the mortgage insurance and the changes of housing prices, and then get the martingale pricing solution of mortgage insurance full coverage insurance policy. Meanwhile, get the partial coverage and combined coverage pricing policy on behalf of Hull-White model.Ultimately, check whether the model is fit or not through a specific analysis on nation’s property market, and to get the intuitive relationship between the insurance policy and all relevant factors based on specific data. By setting related indicators to get a reasonable insurance pricing policy at specific situation.