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Prospective Lifetables: Life Insurance Pricing and Hedging in a Stochastic Mortality Environment

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  • Jorge Bravo

    () (University of Évora, Department of Economics and CEFAGEUE)

  • Carlos Pereira da Silva

    (Department of Management, ISEG - Technical University of Lisbon/Portugal and CIEF)

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    Abstract

    In life insurance, actuaries have traditionally calculated premiums and reserves using a deterministic mortality intensity, which is a function of the age of the insured only. Over the course of the 20th century, the population of the industrialized world underwent a major mortality transition, with a dramatic decline in mortality rates. The mortality decline has been dominated by two major trends: a reduction in mortality due to infectious diseases affecting mainly young ages, and a decrease in mortality at old ages. These mortality improvements have to be taken into account to price long-term life insurance products and to analyse the sustainability of social security systems. In this paper, we argue that pricing and reserving for pension and life insurance products requires dynamic (or prospective) lifetables. We briefly review classic and recent projection methods and adopt a Poisson log-bilinear approach to estimate Portuguese Prospective Lifetables. The advantages of using dynamic lifetables are twofold. Firstly, it provides more realistic premiums and reserves, and secondly, it quantifies the risk of the insurance companies associated with the underlying longevity risks. Finally, we discuss possible ways of transferring the systematic mortality risk to other parties.

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    Bibliographic Info

    Paper provided by University of Evora, CEFAGE-UE (Portugal) in its series CEFAGE-UE Working Papers with number 2012_01.

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    Length: 26 pages
    Date of creation: 2012
    Date of revision:
    Handle: RePEc:cfe:wpcefa:2012_01

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    1. Renshaw, A. E. & Haberman, S., 2003. "On the forecasting of mortality reduction factors," Insurance: Mathematics and Economics, Elsevier, vol. 32(3), pages 379-401, July.
    2. Shripad Tuljapurkar & Carl Boe, . "Mortality Change and Forecasting: How Much and How Little Do We Know?," Pension Research Council Working Papers 98-2, Wharton School Pension Research Council, University of Pennsylvania.
    3. Pitacco, Ermanno, 2004. "Survival models in a dynamic context: a survey," Insurance: Mathematics and Economics, Elsevier, vol. 35(2), pages 279-298, October.
    4. 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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