Mon, 26. Jun 2006 17:09

Publication: "Stochastic Mortality Models and Securitization in Life Insurance" by S. Gaisser

dan (Daniel Bauer)

Stochastic Mortality Models using Securitization in Life Insurance

Sandra Gaißer - 2006. ISBN: 3-931289-71-0, ifa Publications Ulm, Germany, Price: 41,00 EUR

Abstract:

Traditionally, life insurers calculate premiums and reserves based on deterministic models for the mortality. However, these deterministic models perform badly if mortality patterns evolve differently than anticipated, leaving the insurer exposed to (mortality) risk due to the long-term and binding character of life insurance contracts.

In order to account for the uncertainty of future mortality, this work models the mortality (intensity) as a stochastic process. We introduce a new class of stochastic mortality models, which are based on general Lévy processes for the mortality intensity. Due to the structural features of Lévy processes, we are able to incorporate both gradual changes and sudden jumps of the mortality. The evaluation of life insurances is then incorporated into this stochastic mortality framework.

The consideration of stochastic mortality opens up further possibilities for the management and quantification of mortality risk. We propose a securitization approach, which enables the insurer to deal with the longevity risk. By means of securitization, the insurers are able to transfer parts of this risk to the financial markets and, hence, to the investors. In this context, we discuss mortality bonds which payments are contingent on the future development of the mortality. It turns out that deterministic mortality models are inadequate regarding the evaluation of such products. Therefore, we embed these products into the stochastic mortality (intensity) framework and derive the related pricing formula.

The book can be ordered here

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