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Modelling and Management of Mortality Risk: A Review

Scandinavian Actuarial Journal, Vol. 2-3, pp. 79-113, 2008

Pensions Institute Discussion Paper No. PI-0814

47 Pages Posted: 10 Feb 2009 Last revised: 16 Apr 2009

Andrew J. G. Cairns

Heriot-Watt University - Department of Actuarial Science & Statistics

David P. Blake

City University London - Cass Business School - The Pensions Institute

Kevin Dowd

Nottingham University Business School (NUBS)

Date Written: May 1, 2008

Abstract

In the first part of the paper, we consider the wide range of extrapolative stochastic mortality models that have been proposed over the last 15-20 years. A number of models that we consider are framed in discrete time and place emphasis on the statistical aspects of modelling and forecasting. We discuss how these models can be evaluated, compared and contrasted. We also discuss a discrete-time market model that facilitates valuation of mortality-linked contracts with embedded options. We then review several approaches to modelling mortality in continuous time. These models tend to be simpler in nature, but make it possible to examine the potential for dynamic hedging of mortality risk. Finally, we review a range of financial instruments (traded and over-the-counter) that could be used to hedge mortality risk. Some of these, such as mortality swaps, already exist, while others anticipate future developments in the market.

Keywords: Stochastic mortality models, Short-rate models, Market models, Cohort effect, SCOR

Suggested Citation

Cairns, Andrew J. G. and Blake, David P. and Dowd, Kevin, Modelling and Management of Mortality Risk: A Review (May 1, 2008). Scandinavian Actuarial Journal, Vol. 2-3, pp. 79-113, 2008; Pensions Institute Discussion Paper No. PI-0814. Available at SSRN: https://ssrn.com/abstract=1339970 or http://dx.doi.org/10.2139/ssrn.1339970

Andrew J. G. Cairns (Contact Author)

Heriot-Watt University - Department of Actuarial Science & Statistics ( email )

Edinburgh EH14 4AS Scotland
United Kingdom

David P. Blake

City University London - Cass Business School - The Pensions Institute ( email )

London, EC2Y 8HB
Great Britain
+44 (0) 20-7040-5143 (Phone)
+44 (0) 20-7040-8881 (Fax)

Kevin Dowd

Nottingham University Business School (NUBS) ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom

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