Effects of mortality and longevity risk in risk management in life insurance companies

Abstract

Mortality risk posses a huge risk in insurance companies.It is therefore crucial to continuously Carry out research relating to this risk. In this paper mortality risk components Systematic, unsystematic,adverse selection and basis risk which results from hedging Longevity risk are studied broadly. The e ects of this risk’s components in risk managements In life insurance company is demonstrated. An insurance company with a portfolio of annuity and term life assurance is used in the Study. U.S.A data has been used to carry out various analysis, it is obtained from human Mortality database(hmd) and projected through demographic package available in r Programming language.The projections and actuarial present values (apv) are computed Using the extension of the lee-carter (1992) model proposed by brouhns, denuit, and Vermunt (2002a).Lee-carter (1992) propose to t an appropriate auto regressive integrated Moving average(arima) process on the estimated time series of the time index.The projections Are done using arima (0, 1,0) model(random walk with a drift). Various risk Management tools are widely discussed. This includes the transfer of mortality risk to Capital market through mortality contingent bond(mcb) and natural hedging. The default risk measurement tools which comprise of probability of default which measures The frequency of default and the expected mean loss which re ects the amount by Which the assets are not su cient to cover liabilities(average amount of money necessary For funding a case of default during the contract term)are discussed. Probability of default And the mcb are used to display the e ects of mortality risk in risk management. From This study, it is evident that the various mortality risk components have an e ect in pricing And valuation if they are misestimated.