A simplified model for measuring longevity risk for life insurance products

Abstract

In this paper, we propose a simple dynamic mortality model to fit and forecast mortality rates for measuring longevity and mortality risks. This proposal is based on a methodology for modelling interest rates, which assumes that changes in spot interest rates depend linearly on a small number of factors. These factors are identified as interest rates with a given maturity. Similarly, we assume that changes in mortality rates depend linearly on changes in a specific mortality rate, which we call the key mortality rate. One of the main advantages of this model is that it allows the development of an easy to implement methodology to measure longevity and mortality risks using simulation techniques. Particularly, we employ the model to calculate the Value-at-Risk and Conditional-Value-at-Risk of an insurance product testing the accuracy and robustness of our proposal using out-of-sample data from six different populations.