Stochastic Portfolio Specific Mortality and the Quantification of Mortality Basis Risk

21 Pages Posted: 8 Oct 2008 Last revised: 7 May 2009

Date Written: May 6, 2009

Abstract

The last decennium a vast literature on stochastic mortality models has been developed. However, these models are often not directly applicable to insurance portfolios because:

a) For insurers and pension funds it is more relevant to model mortality rates measured in insured amounts instead of measured in number of policies.

b) Often there is not enough insurance portfolio specific mortality data available to fit such stochastic mortality models reliably.

Therefore, in this paper a stochastic model is proposed for portfolio specific mortality experience. Combining this stochastic process with a stochastic country population mortality process leads to stochastic portfolio specific mortality rates, measured in insured amounts. The proposed stochastic process is applied to two insurance portfolios, and the impact on the Value at Risk for longevity risk is quantified. Furthermore, the model can be used to quantify the basis risk that remains when hedging portfolio specific mortality risk with instruments of which the payoff depends on population mortality rates.

Keywords: portfolio specific mortality, stochastic mortality models, mortality basis risk, longevity risk, Solvency 2

JEL Classification: G22, G23

Suggested Citation

Plat, Richard, Stochastic Portfolio Specific Mortality and the Quantification of Mortality Basis Risk (May 6, 2009). Available at SSRN: https://ssrn.com/abstract=1277803 or http://dx.doi.org/10.2139/ssrn.1277803

Richard Plat (Contact Author)

Richard Plat Consultancy ( email )

Volendam
Netherlands

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