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The Investigation of a Forward-Rate Mortality Framework

Alai, Daniel H., Ignatieva, Katja, Sherris, Michael (2019) The Investigation of a Forward-Rate Mortality Framework. Risks, 7 (2). ISSN 2227-9091. (doi:10.3390/risks7020061)

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https://doi.org/10.3390/risks7020061

Abstract

Stochastic mortality models have been developed for a range of applications from demographic projections to financial management. Financial risk based models built on methods used for interest rates and apply these to mortality rates. They have the advantage of being applied to financial pricing and the management of longevity risk. Olivier and Jeffery (2004) and Smith (2005) proposed a model based on a forward-rate mortality framework with stochastic factors driven by univariate gamma random variables irrespective of age or duration. We assess and further develop this model. We generalize random shocks from a univariate gamma to a univariate Tweedie distribution and allow for the distributions to vary by age. Furthermore, since dependence between ages is an observed characteristic of mortality rate improvements, we formulate a multivariate framework using copulas. We find that dependence increases with age and introduce a suitable covariance structure, one that is related to the notion of ax minimum. The resulting model provides a more realistic basis for capturing the risk of mortality improvements and serves to enhance longevity risk management for pension and insurance funds.

Item Type: Article
DOI/Identification number: 10.3390/risks7020061
Uncontrolled keywords: longevity risk; Olivier–Smith model; forward-rate mortality framework; minimum covariance pattern; copulas
Subjects: Q Science > QA Mathematics (inc Computing science)
Divisions: Faculties > Sciences > School of Mathematics Statistics and Actuarial Science > Actuarial Science
Depositing User: Daniel Alai
Date Deposited: 04 Jun 2019 12:29 UTC
Last Modified: 08 Jul 2019 11:42 UTC
Resource URI: https://kar.kent.ac.uk/id/eprint/74245 (The current URI for this page, for reference purposes)
Alai, Daniel H.: https://orcid.org/0000-0001-7989-784X
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