Crunching Mortality and Life Insurance Portfolios with extended CreditRisk+

TL;DR

This paper extends the CreditRisk+ model to include stochastic mortality, enabling accurate, fast loss distribution calculations for life insurance portfolios, with applications in risk management and regulatory compliance.

Contribution

The paper introduces an extended CreditRisk+ framework for mortality modeling, offering greater flexibility, tighter bounds, and direct uncertainty quantification compared to existing models.

Findings

Exact loss distribution derivation for large portfolios

Enhanced mortality forecasting and cause-of-death analysis

Applicable for internal risk models under Solvency II

Abstract

Using an extended version of the credit risk model CreditRisk+, we develop a flexible framework with numerous applications amongst which we find stochastic mortality modelling, forecasting of death causes as well as profit and loss modelling of life insurance and annuity portfolios which can be used in (partial) internal models under Solvency II. Yet, there exists a fast and numerically stable algorithm to derive loss distributions exactly, even for large portfolios. We provide various estimation procedures based on publicly available data. Compared to the Lee-Carter model, we have a more flexible framework, get tighter bounds and can directly extract several sources of uncertainty. Straight-forward model validation techniques are available.