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Stochastic Mortality, Macroeconomic Risks and Life Insurer Solvency

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Author Info

  • Katja Hanewald

    ()
    (Australian School of Business, School of Actuarial Studies, University of New South Wales, Sydney NSW 2052, Australia.)

  • Thomas Post

    ()
    (School of Business and Economics, Department of Finance, Maastricht University, Tongersestraat 53, 6211 LM Maastricht, The Netherlands.)

  • Helmut Gr�ndl

    ()
    (Faculty of Economics and Business Administration, Chair of Insurance and Regulation, International Center for Insurance Regulation, Goethe-Universit&aauml;t Frankfurt am Main, Gr�neburgplatz 1, 60323 Frankfurt am Main, Germany.)

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.

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal The Geneva Papers.

Volume (Year): 36 (2011)
Issue (Month): 3 (July)
Pages: 458-475

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Handle: RePEc:pal:gpprii:v:36:y:2011:i:3:p:458-475

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References

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  1. Kling, Alexander & Richter, Andreas & Ru[ss], Jochen, 2007. "The interaction of guarantees, surplus distribution, and asset allocation in with-profit life insurance policies," Insurance: Mathematics and Economics, Elsevier, vol. 40(1), pages 164-178, January.
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  7. Renshaw, A.E. & Haberman, S., 2006. "A cohort-based extension to the Lee-Carter model for mortality reduction factors," Insurance: Mathematics and Economics, Elsevier, vol. 38(3), pages 556-570, June.
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  14. Brouhns, Natacha & Denuit, Michel & Vermunt, Jeroen K., 2002. "A Poisson log-bilinear regression approach to the construction of projected lifetables," Insurance: Mathematics and Economics, Elsevier, vol. 31(3), pages 373-393, December.
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  16. Tsai, Jeffrey T. & Wang, Jennifer L. & Tzeng, Larry Y., 2010. "On the optimal product mix in life insurance companies using conditional value at risk," Insurance: Mathematics and Economics, Elsevier, vol. 46(1), pages 235-241, February.
  17. Jennifer L. Wang & H.C. Huang & Sharon S. Yang & Jeffrey T. Tsai, 2010. "An Optimal Product Mix for Hedging Longevity Risk in Life Insurance Companies: The Immunization Theory Approach," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(2), pages 473-497.
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Cited by:
  1. Maria Grith & Wolfgang Härdle & Juhyun Park, 2009. "Shape invariant modelling pricing kernels and risk aversion," SFB 649 Discussion Papers SFB649DP2009-041, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  2. Barbara Choroś & Wolfgang Härdle & Ostap Okhrin, 2009. "CDO and HAC," SFB 649 Discussion Papers SFB649DP2009-038, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  3. Höring, Dirk, 2012. "Will Solvency II market risk requirements bite? The impact of Solvency II on insurers' asset allocation," ICIR Working Paper Series 11/12, International Center for Insurance Regulation (ICIR), Goethe University Frankfurt.
  4. Roland Strausz, 2009. "The Political Economy of Regulatory Risk," SFB 649 Discussion Papers SFB649DP2009-040, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  5. Michał Grajek & Lars-Hendrik Röller, 2009. "Regulation and Investment in Network Industries: Evidence from European Telecoms," SFB 649 Discussion Papers SFB649DP2009-039, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  6. Richter, Andreas & Weber, Frederik, 2009. "Mortality-Indexed Annuities," Discussion Papers in Business Administration 10994, University of Munich, Munich School of Management.

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