Volterra mortality model: actuarial valuation and risk management with long-range dependence

DOI10.1016/J.INSMATHECO.2020.10.002MaRDI QIDQ2656983zbMATH OpenOpenAlexFDO

Authors Ling Wang, Mei Choi Chiu, Hoi Ying Wong

Publication date 17 March 2021

Published in Insurance Mathematics \& Economics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/2009.09572

zbMATH Keywords

affine Volterra processeslong-range dependencemean-variance hedgingstochastic mortalityvaluation

Mathematics Subject Classification ID

Fractional processes, including fractional Brownian motion (60G22) Actuarial mathematics (91G05)

Abstract: While abundant empirical studies support the long-range dependence (LRD) of mortality rates, the corresponding impact on mortality securities are largely unknown due to the lack of appropriate tractable models for valuation and risk management purposes. We propose a novel class of Volterra mortality models that incorporate LRD into the actuarial valuation, retain tractability, and are consistent with the existing continuous-time affine mortality models. We derive the survival probability in closed-form solution by taking into account of the historical health records. The flexibility and tractability of the models make them useful in valuing mortality-related products such as death benefits, annuities, longevity bonds, and many others, as well as offering optimal mean-variance mortality hedging rules. Numerical studies are conducted to examine the effect of incorporating LRD into mortality rates on various insurance products and hedging efficiency.

Review text

The authors propose a novel class of Volterra mortality models that incorporate long-range dependence (LRD) into the actuarial valuation, retain tractability, and are consistent with the existing continuous-time affine mortality models. To include the LRD, the authors suppose that the counting process \(N(t)\) of the number of deaths has an intensity \(\mu(t)=f(X(t))\) where \(X(t)\) follows a fractional Brownian motion which is equivalent to a Volterra process. The survival probability is derived in closed form by taking into account the historical health records. The models can be used for valuing mortality-related products such as death benefits, annuities, longevity bonds, as well as for offering optimal mean-variance mortality hedging rules. Numerical studies are conducted to examine the effect of incorporating LRD into mortality rates on various insurance products and hedging efficiency.

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Cited in

(12)

• Time-consistent longevity hedging with long-range dependence
• Longevity risk and capital markets: the 2019--20 update
• COVID-19 and credit risk: a long memory perspective
• Stochastic mortality dynamics driven by mixed fractional Brownian motion
• Irreversible reinsurance: a singular control approach
• Time-consistent mean-variance reinsurance-investment problem with long-range dependent mortality rate
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