Modeling and pricing longevity derivatives using Skellam distribution

Ko-Lun Kung, I-Chien Liu and Chou-Wen Wang

Insurance: Mathematics and Economics, 2021, vol. 99, issue C, 341-354

Abstract: We propose a novel mortality improvement model with the difference of death counts follows the Skellam distribution. We extend Mitchell et al. (2013) by considering the difference in Poisson death counts instead of the ratio of subsequent mortality rate, which does not have a known distribution. We derive the iterative estimators of the model from the Skellam distribution. Our model can employ maximum likelihood estimation for estimation issues such as missing data and provides a better fit than Mitchell et al. (2013). Using English and Wales mortality rate age 0-89 data during 1950-2016, the model estimate suggests that the age-dependent mortality improvement is slower than the benchmark, which coincides with a recent observation by Office for National Statistics (2018). The forecasting performance outperforms the Poisson and M10 model. We make inferences on the price of longevity swaps and analyze how the volatility shock of mortality improvement affects the premium of longevity swaps.

Keywords: Mortality modeling; Skellam distribution; Mortality forecasting; Longevity swaps; Heavy tail (search for similar items in EconPapers)
JEL-codes: C46 G22 J11 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:99:y:2021:i:c:p:341-354

DOI: 10.1016/j.insmatheco.2021.04.002

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