Modelling and Managing Mortality and Longevity Risks

Kai Kaufhold

Mortality or longevity risk is what makes a life insurance product insurance. Whether the transfer of longevity risk from an individual to an insurance company in the form of an annuity or the guaranteed annuitisation of a savings product, or whether the insurance company offers a minimum guaranteed death benefit, mortality risk is involved. Since it is an inherent part of the value proposition of the insurance company, the provider must be able to measure mortality risk and manage it. Traditionally, insurance companies have managed mortality and longevity risk by charging a premium with sufficient margins, holding prudent reserves and capital against the risk, and trusting in the law of large numbers.11Milevsky et al (2006). In a new era of modern accounting and regulatory frameworks, this can no longer be viewed as sufficient, especially when it comes to non-traditional products where the exposure to mortality risk may be contingent upon the performance of certain financial assets.

In this chapter, we will investigate how to create portfolio-specific mortality tables, how to model mortality trends and how to manage the risk associated with mortality or longevity by means of

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