Prospective Lifetables: Life Insurance Pricing and Hedging in a Stochastic Mortality Environment
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.
|Date of creation:||2012|
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- 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.
- Arthur Renshaw & Steven Haberman, 2003. "Lee-Carter mortality forecasting: a parallel generalized linear modelling approach for England and Wales mortality projections," Journal of the Royal Statistical Society Series C, Royal Statistical Society, vol. 52(1), pages 119-137.
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- 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.
- Pitacco, Ermanno, 2004. "Survival models in a dynamic context: a survey," Insurance: Mathematics and Economics, Elsevier, vol. 35(2), pages 279-298, October.
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