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Applications of Forward Mortality Factor Models in Life Insurance Practice*

  • Nan Zhu

    (Department of Risk Management and Insurance, Georgia State University, 35 Broad Street, 11th Floor, Atlanta, GA 30303, U.S. E-mails: nzhu1@student.gsu.edu; dbauer@gsu.edu)

  • Daniel Bauer

    (Department of Risk Management and Insurance, Georgia State University, 35 Broad Street, 11th Floor, Atlanta, GA 30303, U.S. E-mails: nzhu1@student.gsu.edu; dbauer@gsu.edu)

Registered author(s):

    Two of the most important challenges for the application of stochastic mortality models in life insurance practice are their complexity and their apparent incompatibility with classical life contingencies theory, which provides the backbone of insurers’ Electronic Data Processing systems. Forward Mortality Factor Models comprise one model class that overcomes these challenges. Relying on a simple model version that originates from a semi-parametric estimation based on British population mortality data, this paper demonstrates the merits of this model class by discussing several practically important example applications. In particular, we calculate the Economic Capital for a stylised life insurer, we present a closed-form solution for the value of a Guaranteed Annuity Option, and we derive the fair option fee for a Guaranteed Minimum Income Benefit within a Variable Annuity contract. Our numerical results illustrate the economic significance of systematic mortality risk.

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    Article provided by Palgrave Macmillan in its journal The Geneva Papers on Risk and Insurance Issues and Practice.

    Volume (Year): 36 (2011)
    Issue (Month): 4 (October)
    Pages: 567-594

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    Handle: RePEc:pal:gpprii:v:36:y:2011:i:4:p:567-594
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