Assessing the solvency of insurance portfolios via a continuous time cohort model

Petar Jevtic' and Luca Regis ()
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Petar Jevtic': Department of Mathematics and Statistics, McMaster University

No 7/2014, Working Papers from IMT School for Advanced Studies Lucca

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.

Keywords: longevity risk; natural hedging; continuous-time cohort models for longevity; solvency of insurance portfolios; solvency requirements; longevity and interest-rate risk (search for similar items in EconPapers)
JEL-codes: G22 G32 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2014-07, Revised 2014-07
New Economics Papers: this item is included in nep-ias and nep-rmg
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Published in EIC working paper series

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http://eprints.imtlucca.it/2261/1/EIC_WP_7_2014.pdf First version, 2014 (application/pdf)

Related works:
Journal Article: Assessing the solvency of insurance portfolios via a continuous-time cohort model (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:ial:wpaper:7/2014

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