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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Full-text Version
Publisher’s Version
Language
English
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