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A Comparison Study on Methods of Assessing Longevity Risk

  • Journal of Insurance and Finance
  • 2013, 24(3), pp.93-121
  • Publisher : Korea Insurance Research Institute
  • Research Area : Social Science > Business Management

Sejoong Kim 1

1보험연구원

Accredited

ABSTRACT

This paper compared three methods of assessing the longevity risk of life insurers, which are the shock approach, VaR approach and stressed trend approach, using Korean mortality data. To consider model risk, we applied four stochastic mortality models (Lee-Carter model, Currie model, CBD model, CBD2 model) to each method. The longevity risk calculations using the shock approach did not vary considerably with mortality models; however, the figures increased consistently with age. The longevity risk calculations using the VaR approach were lower than or about the same as those using the shock approach; however, figures vary considerably across mortality models. The VaR approach would have a significant mortality risk. The results from the stress trend approach, in the 99.5 percentile, show a similar trend with those from the VaR approach; however, it overestimates longevity risk more than the VaR approach. A confidence level from 95 to 99 would be enough to equate the results from the stress trend approach to those from the shock approach. Meanwhile, lower interest rates increased longevity risk in life insurers. These pros and cons of the three methods should be considered when introducing longevity risk to Korean solvency regulation.

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