Title

Multi-population mortality models : a factor copula approach

Document Type

Journal article

Source Publication

Insurance: Mathematics and Economics

Publication Date

7-2015

Volume

63

First Page

135

Last Page

146

Publisher

Elsevier BV

Keywords

Multi-population mortality model, Factor copulas, Maximum entropy principle, Mortality/longevity risk pricing, Mortality/longevity risk hedging

Abstract

Modeling mortality co-movements for multiple populations have significant implications for mortality/longevity risk management. A few two-population mortality models have been proposed to date. They are typically based on the assumption that the forecasted mortality experiences of two or more related populations converge in the long run. This assumption might be justified by the long-term mortality co-integration and thus be applicable to longevity risk modeling. However, it seems too strong to model the short-term mortality dependence. In this paper, we propose a two-stage procedure based on the time series analysis and a factor copula approach to model mortality dependence for multiple populations. In the first stage, we filter the mortality dynamics of each population using an ARMA–GARCH process with heavy-tailed innovations. In the second stage, we model the residual risk using a one-factor copula model that is widely applicable to high dimension data and very flexible in terms of model specification. We then illustrate how to use our mortality model and the maximum entropy approach for mortality risk pricing and hedging. Our model generates par spreads that are very close to the actual spreads of the Vita III mortality bond. We also propose a longevity trend bond and demonstrate how to use this bond to hedge residual longevity risk of an insurer with both annuity and life books of business.

DOI

10.1016/j.insmatheco.2015.03.022

Print ISSN

01676687

E-ISSN

18735959

Publisher Statement

Copyright © 2015 Elsevier B.V. All rights reserved.

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Recommended Citation

Chen, H., MacMinn, R., & Sun, T. (2015). Multi-population mortality models: A factor copula approach. Insurance: Mathematics and Economics, 63, 135-146. doi: 10.1016/j.insmatheco.2015.03.022