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Calibrating affine stochastic mortality models using term assurance premiums

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  • Russo, Vincenzo
  • Giacometti, Rosella
  • Ortobelli, Sergio
  • Rachev, Svetlozar
  • Fabozzi, Frank J.

Abstract

In this paper, we focus on the calibration of affine stochastic mortality models using term assurance premiums. We view term assurance contracts as a "swap" in which policyholders exchange cash flows (premiums vs. benefits) with an insurer analogous to a generic interest rate swap or credit default swap. Using a simple bootstrapping procedure, we derive the term structure of mortality rates from a stream of contract quotes with different maturities. This term structure is used to calibrate the parameters of affine stochastic mortality models where the survival probability is expressed in closed form. The Vasicek, Cox-Ingersoll-Ross, and jump-extended Vasicek models are considered for fitting the survival probabilities term structure. An evaluation of the performance of these models is provided with respect to premiums of three Italian insurance companies.

Suggested Citation

  • Russo, Vincenzo & Giacometti, Rosella & Ortobelli, Sergio & Rachev, Svetlozar & Fabozzi, Frank J., 2011. "Calibrating affine stochastic mortality models using term assurance premiums," Insurance: Mathematics and Economics, Elsevier, vol. 49(1), pages 53-60, July.
    • Handle: RePEc:eee:insuma:v:49:y:2011:i:1:p:53-60
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    3. Apicella, Giovanna & Dacorogna, Michel M, 2016. "A General framework for modelling mortality to better estimate its relationship with interest rate risks," MPRA Paper 75788, University Library of Munich, Germany.
    4. Tat Wing Wong & Mei Choi Chiu & Hoi Ying Wong, 2017. "Managing Mortality Risk With Longevity Bonds When Mortality Rates Are Cointegrated," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 84(3), pages 987-1023, September.
    5. Ying Jiao & Yahia Salhi & Shihua Wang, 2021. "Dynamic Bivariate Mortality Modelling," Working Papers hal-03244324, HAL.
    6. Fung, Man Chung & Ignatieva, Katja & Sherris, Michael, 2014. "Systematic mortality risk: An analysis of guaranteed lifetime withdrawal benefits in variable annuities," Insurance: Mathematics and Economics, Elsevier, vol. 58(C), pages 103-115.
    7. Deelstra, Griselda & Grasselli, Martino & Van Weverberg, Christopher, 2016. "The role of the dependence between mortality and interest rates when pricing Guaranteed Annuity Options," Insurance: Mathematics and Economics, Elsevier, vol. 71(C), pages 205-219.
    8. Ankush Agarwal & Christian-Oliver Ewald & Yongjie Wang, 2023. "Hedging longevity risk in defined contribution pension schemes," Computational Management Science, Springer, vol. 20(1), pages 1-34, December.
    9. Russo, Vincenzo & Giacometti, Rosella & Fabozzi, Frank J., 2017. "Intensity-based framework for surrender modeling in life insurance," Insurance: Mathematics and Economics, Elsevier, vol. 72(C), pages 189-196.
    10. Georgina Onuma Kalu & Chinemerem Dennis Ikpe & Benjamin Ifeanyichukwu Oruh & Samuel Asante Gyamerah, 2020. "State Space Vasicek Model of a Longevity Bond," Papers 2011.12753, arXiv.org.
    11. Ying Jiao & Yahia Salhi & Shihua Wang, 2022. "Dynamic Bivariate Mortality Modelling," Methodology and Computing in Applied Probability, Springer, vol. 24(2), pages 917-938, June.
    12. David Atance & Alejandro Balbás & Eliseo Navarro, 2020. "Constructing dynamic life tables with a single-factor model," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 43(2), pages 787-825, December.

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