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Frailty-based mortality models and reserving for longevity risk

Author

Listed:
  • Maria Carannante

    (University of Salerno)

  • Valeria D’amato

    (University of Salerno
    Sapienza University of Rome)

  • Steven Haberman

    (University of London)

  • Massimiliano Menzietti

    (University of Salerno)

Abstract

For the life insurance industry and pension schemes, mortality projections are critical for accurately managing exposure to longevity risk in terms of both premium setting and reserving. Frailty has been identified as an important latent factor underpinning the evolution of mortality rates. It represents the comorbidities that drive the deterioration of the human body’s physiological capacity. In this paper, we propose a stochastic mortality model that incorporates the trend in frailty, and we analyse the gap between the actuarial evaluations of premiums and technical provisions calculated under frailty-based and traditional stochastic mortality models. We observe that the frailty-based model leads to higher levels of uncertainty in estimates and projections (compared to a traditional stochastic mortality model), which is attributed to the explicit modelling of the comorbidities. This leads to proposing a potentially important policy-oriented recommendation: the incorporation of frailty in mortality modelling would allow for the profiling of mortality according to the portfolio in force for the insurer (or pension scheme), thereby mitigating the problem of adverse selection.

Suggested Citation

  • Maria Carannante & Valeria D’amato & Steven Haberman & Massimiliano Menzietti, 2024. "Frailty-based mortality models and reserving for longevity risk," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 49(2), pages 320-339, April.
    • Handle: RePEc:pal:gpprii:v:49:y:2024:i:2:d:10.1057_s41288-024-00319-y
    DOI: 10.1057/s41288-024-00319-y
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    References listed on IDEAS

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