Stochastic Mortality, Macroeconomic Risks, and Life Insurer Solvency
University of New South Wales - ARC Centre of Excellence in Population Ageing Research and School of Risk and Actuarial Studies
Maastricht University - School of Business and Economics - Department of Finance; Netspar
Goethe University Frankfurt - House of Finance; International Center for Insurance Regulation
January 10, 2012
The Geneva Papers on Risk and Insurance - Issues and Practice, Vol. 36, No. 3, pp. 458-475, 2011
Motivated by a recent demographic study establishing a link between macroeconomic fluctuations and the mortality index kt in the Lee-Carter model, we develop a dynamic asset-liability model to assess the impact of macroeconomic fluctuations on the solvency of a life insurance company. Liabilities in this stochastic simulation framework are driven by a GDP-linked variant of the Lee-Carter mortality model. Furthermore, interest rates and stock prices react to changes in GDP, which itself is modelled as a stochastic process. Our simulation results show that insolvency probabilities are significantly higher when the reaction of mortality rates to changes in GDP is incorporated.
Number of Pages in PDF File: 29
Keywords: Life insurance, asset-liability management, stochastic mortality, Lee-Carter model, business cycle
JEL Classification: G22, G23, G28, G32, E32, J11Accepted Paper Series
Date posted: February 14, 2009 ; Last revised: January 11, 2012
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