A Unified Framework for Insurance Demand and Mortality Immunization (Q6583016)

To assess the mortality/longevity risk for the insured and insurers, the authors of the article choose the stochastic model by \textit{A. J. G. Cairns} et al. [``A two-factor model for stochastic mortality with parameter uncertainty: theory and calibration'', J. Risk. Insur. 73, No. 4, 687--718 (2006; \url{doi:10.1111/j.1539-6975.2006.00195.x})] described by the following equation \N\[\Nq_{x+t}=\frac{\mathrm{e}^{A_1(t+1)+A_2(t+1)(x+t)}}{1+\mathrm{e}^{A_1(t+1)+A_2(t+1)(x+t)}}, \N\]\Nwhere \(q_{x+t}\) represents the one-year death probability for an individual aged \(x+t\) in year \(t\), and \(A(t)=(A_1(t),A_2(t))\) is a two-dimensional random walk with drift: \N\[\NA(t)=A(t)+\mu+C\, Z(t+1).\N\]\NHere \(\mu=(\mu_1,\mu_2)^{T}\) is a constant parameter vector, \(C\) is a \(2\times 2\) constant upper triangular Cholesky square root matrix of a covariance matrix, and \(Z\) is a stochastic process represented by a two-dimensional standard normal random variable.\N\NAssuming that the population lives according to the above model, the article's authors jointly examine the demand and supply of whole life insurance and deferred life annuities and connect them in a market equilibrium framework. On the one hand, an insurer determines its optimal product mix by minimizing the CVaR of the loss proportion in its lines of business. On the other hand, consumers decide their optimal insurance demand by maximizing their lifetime expected utility. By matching demand and supply, the article's authors derive the prices and quantities of insurance products that clear the market.