Assessing Investment and Longevity Risks within Immediate Annuities

Bauer, Daniel J.; Weber, Frederik D.

doi:10.2202/1793-2157.1031

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Accounting For Stochastic Mortality In Life Insurance Companies1

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2012

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“…Gründl, Post, and Schulze (2006) and Cox and Lin (2007) examine natural hedging opportunities in the annuity and life insurance business; Dowd, Cairns, and Blake (2006), Hári et al (2008b), and Bauer and Weber (2008) assess the impact of stochastic mortality on an insurer's risk exposure.…”

Section: Accounting For Stochastic Mortality In Life Insurance Companiesmentioning

confidence: 99%

Stochastic Mortality, Macroeconomic Risks, and Life Insurer Solvency

2012

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Motivated by a recent demographic study establishing a link between macroeconomic fluctuations and the mortality index k t in the Lee-Carter model, we assess the impact of macroeconomic fluctuations on the solvency of a life insurance company. Liabilities in our stochastic simulation framework are driven by a GDP-linked variant of the Lee-Carter mortality model. Furthermore, interest rates and stock prices are allowed to react to changes in GDP, which itself is modeled as a stochastic process. Our results show that insolvency probabilities are significantly higher when the reaction of mortality rates to changes in GDP is incorporated.

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