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Stochastic Mortality: The Impact on Target Capital

Published online by Cambridge University Press:  09 August 2013

Annamaria Olivieri  and
Ermanno Pitacco
Annamaria Olivieri
Affiliation:
University of Parma, Faculty and Dept of Economics, Via J.F. Kennedy, 6 – 43100 Parma (Italy), E-Mail: annamaria.olivieri@unipr.it
Ermanno Pitacco
Affiliation:
University of Trieste, Faculty of Economics, Dept of Applied Mathematics, P.le Europa, 1 – 34127 Trieste (Italy), E-Mail: ermanno.pitacco@econ.units.it
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Abstract

In this paper, we take the point of view of an insurer dealing with life annuities, which aims at building up a (partial) internal model in order to quantify the impact of mortality risks, namely process and longevity risk, in view of taking appropriate risk management actions. We assume that a life table, providing a best-estimate assessment of annuitants' future mortality is available to the insurer; conversely, the insurer has no access to data sets and the methodology underlying the construction of the life table. Nonetheless, the insurer is aware that, in the presence of mortality risks, a stochastic approach is required. The (projected) life table, which provides a deterministic description of future mortality, should then be used as the basic input of a stochastic model.

The model we propose focuses on the annual number of deaths in a given cohort, which we represent allowing for a random mortality rate. To this purpose, we adopt the widely used Poisson model, first assuming a Gamma-distributed random parameter, and second introducing time-dependence in the parameter itself. Further, we define a Bayesian-inferential procedure for updating the parameters to experience in some situations. The setting we define does not demand advanced analytical tools, while allowing for process and longevity risk in a rigorous way.

The model is then implemented for capital allocation purposes. We investigate the amount of the required capital for a given life annuity portfolio, based on solvency targets which could be adopted within internal models. The outcomes of such an investigation are compared with the capital required according to some standard rules, in particular those proposed within the Solvency 2 project.

Keywords

Life annuitiesRandom fluctuationsSystematic deviationsProcess riskLongevity riskSolvencyInsurance risk managementInternal models
Type
Research Article
Information
ASTIN Bulletin: The Journal of the IAA , Volume 39 , Issue 2 , November 2009 , pp. 541 - 563
Copyright
Copyright © International Actuarial Association 2009

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