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Assessing the solvency of insurance portfolios via a continuous time cohort model

Jevtić, Petar and Regis, Luca Assessing the solvency of insurance portfolios via a continuous time cohort model. EIC working paper series #7/2014 IMT Institute for Advanced Studies Lucca ISSN 2279-6894.

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This paper evaluates the solvency of a portfolio of assets and liabilities of an insurer subject to both longevity and financial risks. Liabilities are evaluated at fair-value and, as a consequence, interest-rate risk can affect both the assets and the liabilities. Longevity risk is described via a continuous-time cohort model. We evaluate the effects of natural hedging strategies on the risk profile of an insurance portfolio in run-off. Numerical simulations, calibrated to UK historical data, show that systematic longevity risk is of particular importance and needs to be hedged. Natural hedging can improve the solvency of the insurer, if interest-rate risk is appropriately managed. We stress that asset allocation choices should not be independent of the composition of the liability portfolio of the insurer.

Item Type: Working Paper (EIC working paper series)
Uncontrolled Keywords: longevity risk; natural hedging; continuous-time cohort models for longevity; solvency of insurance portfolios; solvency requirements; longevity and interest-rate risk - JEL classification: G22, G32
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
H Social Sciences > HG Finance
Research Area: Economics and Institutional Change
Depositing User: Ms T. Iannizzi
Date Deposited: 22 Jul 2014 14:24
Last Modified: 22 Jul 2014 14:24
URI: http://eprints.imtlucca.it/id/eprint/2261

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