Assessing the solvency of insurance portfolios via a continuous-time cohort model |
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| Institution: | 1. McMaster University, Department of Mathematics and Statistics, Hamilton, Ontario L8S 4K1, Canada;2. IMT Institute for Advanced Studies Lucca; AXES Research Unit; Piazza San Francesco, 19 55100 Lucca, Italy;1. Netspar, CentER, Department of Econometrics and Operations Research, Tilburg University, Netherlands;2. APG and Netspar, CentER, Department of Economics, Tilburg University, Netherlands;3. Netspar, Faculty of Economics and Business, University of Amsterdam, Netherlands;1. KU Leuven & Deutsche Bundesbank, Center for Economic Studies, Naamsestraat 69, 3000 Leuven, Belgium;2. TU Dortmund University, Faculty of Business, Economics, and Social Sciences, Vogelpothsweg 87, 44221 Dortmund, Germany;1. Swiss Finance Institute and University of Lausanne, Faculty of Business and Economics, CH 1015 Lausanne, Switzerland;2. University of Lausanne, Faculty of Business and Economics, CH 1015 Lausanne, Switzerland;1. McMaster University, Department of Mathematics and Statistics, Ontario L8S 4K1, Canada;2. University of Torino, Department of Economics and Statistics, C.so Unione Sovietica, 218 bis, 10134 Torino, Italy;3. Politecnico di Torino, Viale Pier Andrea Mattioli, 39, 10125 Torino, Italy;4. Department of Mathematical Sciences G. L. Lagrange, Politecnico di Torino, Corso Duca degli Abruzzi, 24, Torino, Italy |
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| Abstract: | This paper evaluates the solvency of a portfolio of assets and liabilities of an insurer subject to both longevity and financial risks. Liabilities are evaluated at fair-value and, as a consequence, interest-rate risk can affect both the assets and the liabilities. Longevity risk is described via a continuous-time cohort model. We evaluate the effects of natural hedging strategies on the risk profile of an insurance portfolio in run-off. Numerical simulations, calibrated to UK historical data, show that systematic longevity risk is of particular importance and needs to be hedged. Natural hedging can improve the solvency of the insurer, if interest-rate risk is appropriately managed. We stress that asset allocation choices should not be independent of the composition of the liability portfolio of the insurer. |
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| Keywords: | Longevity risk Natural hedging Continuous-time cohort models for longevity Solvency of insurance portfolios Solvency requirements Longevity and interest-rate risk |
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