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A Value-at-Risk framework for longevity trend risk

Published online by Cambridge University Press:  25 January 2013

S. J. Richards ,
I. D. Currie  and
G. P. Ritchie
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Abstract

Longevity risk faced by annuity portfolios and defined-benefit pension schemes is typically long-term, i.e. the risk is of an adverse trend which unfolds over a long period of time. However, there are circumstances when it is useful to know by how much expectations of future mortality rates might change over a single year. Such an approach lies at the heart of the one-year, value-at-risk view of reserves, and also for the pending Solvency II regime for insurers in the European Union. This paper describes a framework for determining how much a longevity liability might change based on new information over the course of one year. It is a general framework and can accommodate a wide choice of stochastic projection models, thus allowing the user to explore the importance of model risk. A further benefit of the framework is that it also provides a robustness test for projection models, which is useful in selecting an internal model for management purposes.

Keywords

Longevity riskmortality projectionsvalue-at-riskSolvency IImodel riskLee-CarterAge-Period-CohortCairns-Blake-DowdP-spline
Type
Sessional meetings: papers and abstracts of discussions
Information
British Actuarial Journal , Volume 19 , Issue 1 , March 2014 , pp. 116 - 139
Copyright
Copyright © Institute and Faculty of Actuaries 2013 

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