Stochastic Mortality, Macroeconomic Risks, and Life Insurer Solvency

The Geneva Papers on Risk and Insurance - Issues and Practice, Vol. 36, No. 3, pp. 458-475, 2011

29 Pages Posted: 14 Feb 2009 Last revised: 11 Jan 2012

See all articles by Katja Hanewald

Katja Hanewald

University of New South Wales - ARC Centre of Excellence in Population Ageing Research (CEPAR)

Thomas Post

Maastricht University - School of Business and Economics - Department of Finance; Netspar

Helmut Gründl

Goethe University Frankfurt - Department of Finance; International Center for Insurance Regulation

Date Written: January 10, 2012

Abstract

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.

Keywords: Life insurance, asset-liability management, stochastic mortality, Lee-Carter model, business cycle

JEL Classification: G22, G23, G28, G32, E32, J11

Suggested Citation

Hanewald, Katja and Post, Thomas and Gründl, Helmut, Stochastic Mortality, Macroeconomic Risks, and Life Insurer Solvency (January 10, 2012). The Geneva Papers on Risk and Insurance - Issues and Practice, Vol. 36, No. 3, pp. 458-475, 2011. Available at SSRN: https://ssrn.com/abstract=1342609 or http://dx.doi.org/10.2139/ssrn.1342609

Katja Hanewald (Contact Author)

University of New South Wales - ARC Centre of Excellence in Population Ageing Research (CEPAR) ( email )

ARC Centre of Excellence in Population Ageing Rese
The University of New South Wales
Sydney, New South Wales NSW 2052
Australia

Thomas Post

Maastricht University - School of Business and Economics - Department of Finance ( email )

Tongersestraat 53
Maastricht, 6200 MD
Netherlands
+31 43 38 83899 (Phone)
+31 43 38 84875 (Fax)

HOME PAGE: http://www.thomas-post.com

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

HOME PAGE: http://www.netspar.nl

Helmut Gründl

Goethe University Frankfurt - Department of Finance ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60323
Germany

HOME PAGE: http://https://www.wiwi.uni-frankfurt.de/en/departments/finance/home.html

International Center for Insurance Regulation ( email )

House of Finance
Campus Westend, Goethe University
Frankfurt am Main, D-60323
Germany

HOME PAGE: http://www.icir.de

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