DISCUSSION PAPER PI-1015
One-Year Value-At-Risk For Longevity And Mortality
Richard Plat
Upcoming new regulation on regulatory required solvency capital for insurers
will be
predominantly based on a one-year Value-at-Risk measure. This measure aims
at covering
the risk of the variation in the projection year as well as the risk of changes
in the best
estimate projection for future years. This paper addresses the issue how to
determine this
Value-at-Risk for longevity and mortality risk. Naturally this requires stochastic
mortality
rates. The last decennium a vast literature on stochastic mortality models
has been developed.
However, very few of them are suitable for determining the one-year value-at-risk.
This
requires a model for mortality trends instead of mortality rates. Therefore,
we will introduce
a stochastic mortality trend model that fits this purpose. The model is transparent,
easy to
interpret and based on well known concepts in stochastic mortality modeling.
Additionally,
we introduce an approximation method based on duration and convexity concepts
to apply
the stochastic mortality rates to specific insurance portfolios.
JEL classification: G22; G23; J11
Subject classification: IM10; IE43; IB10
Keywords: one-year value-at-risk, stochastic mortality trend model, Solvency
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