Affine Processes for Dynamic Mortality and Actuarial Valuations

Abstract

We address the risk analysis and market valuation of life insurance contracts in a jump-diffusion setup. We exploit the analytical tractability of affine processes to deal simultaneously with financial and demographic risks affecting a wide range of insurance covers. We then focus on mortality at pensionable ages and show how the risk of longevity can be taken into account. A parallel with the pricing of certain credit risky securities is drawn, in order to employ important results derived in that field.

Keywords: Affine jump-diffusion, stochastic mortality, doubly stochastic processes, longevity risk, fair value

JEL Classification: G13, G22, J11, M40