Multi-state models for evaluating conversion options in life insurance

In this paper we propose a multi-state model for the evaluation of the conversion option contract. The multi-state model is based on age-indexed semi-Markov chains that are able to reproduce many important aspects that influence the valuation of the option such as the durationproblem,thetimenon-homogeneityandtheageingeffect.Thevalueoftheconversion option is evaluated after the formal description of this contract