Association and heterogeneity of insured lifetimes in the Lee–Carter framework

Michel Denuit and Esther Frostig

Scandinavian Actuarial Journal, 2007, vol. 2007, issue 1, 1-19

Abstract: This paper is devoted to the study of some unexpected consequences of the Lee–Carter model for mortality projection. The fact that survival probabilities are governed by a stochastic process induces some positive dependence between insured lifetimes (namely, association). This, in turn, has an impact on solvency capital (as measured by distortion risk measures, for instance). Failing to take this dependence into account, by assuming falsely that the lifetimes are independent, leads to systematic underestimations of the risk capital. The heterogeneity between the policy benefits and the insured lifetimes is also studied (with the help of majorisation, Schur-increasingness and a frailty model).

Date: 2007
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DOI: 10.1080/03461230601165029

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