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Mean reversion in stochastic mortality: why and how?

Author

Listed:
  • Zeddouk, Fadoua

    (Université catholique de Louvain, LIDAM/ISBA, Belgium)

  • Devolder, Pierre

    (Université catholique de Louvain, LIDAM/ISBA, Belgium)

Abstract

Life insurance companies use stochastic models to forecast mortality. According to the literature, non-mean reversion models are more suitable for mortality modelling than mean reversion models with a fixed long-term target. In this paper, we adopt stochastic affine processes for the force of mortality and study the impact of adding a time-dependent long-term mean reversion level to two non-mean-reverting processes. We calibrate the models to different generations of the Belgian population and assess these models’ abilities to predict mortality using different statistical methodologies. The backtest shows that the survival curves provided by the mean-reverting processes are closer to reality. Thus, we conclude that incorporating a time-dependent target into these considered models improves their performance significantly.

Suggested Citation

  • Zeddouk, Fadoua & Devolder, Pierre, 2020. "Mean reversion in stochastic mortality: why and how?," LIDAM Reprints ISBA 2020018, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    • Handle: RePEc:aiz:louvar:2020018
    Note: In: European Actuarial Journal - Issue 2/2020, 2020
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    Cited by:

    1. Blake, David & Cairns, Andrew J.G., 2021. "Longevity risk and capital markets: The 2019-20 update," Insurance: Mathematics and Economics, Elsevier, vol. 99(C), pages 395-439.
    2. Hainaut, Donatien, 2022. "A calendar year mortality model in continuous time," LIDAM Discussion Papers ISBA 2022019, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    3. 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.
    4. Zeddouk, Fadoua & Devolder, Pierre, 2022. "Pricing and hedging of longevity basis risk through securitization," LIDAM Discussion Papers ISBA 2022038, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    5. Fadoua Zeddouk & Pierre Devolder, 2020. "Longevity Modelling and Pricing under a Dependent Multi-Cohort Framework," Risks, MDPI, vol. 8(4), pages 1-23, November.
    6. Albrecher, Hansjörg & Bladt, Martin & Bladt, Mogens & Yslas, Jorge, 2022. "Mortality modeling and regression with matrix distributions," Insurance: Mathematics and Economics, Elsevier, vol. 107(C), pages 68-87.

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