Mortality data reliability in an internal model

TL;DR

This paper examines how anomalies in mortality data affect internal longevity risk models within the Solvency II framework, proposing corrections to improve data quality and impact on capital requirements.

Contribution

It extends existing mortality data correction methods to West Germany and assesses the impact of data anomalies on longevity risk and capital requirements.

Findings

Corrected mortality tables lead to slightly lower capital requirements.

Data quality improvements enable more accurate longevity risk assessments.

Longevity risk assessment remains stable despite data corrections.

Abstract

In this paper, we discuss the impact of some mortality data anomalies on an internal model capturing longevity risk in the Solvency 2 framework. In particular, we are concerned with abnormal cohort effects such as those for generations 1919 and 1920, for which the period tables provided by the Human Mortality Database show particularly low and high mortality rates respectively. To provide corrected tables for the three countries of interest here (France, Italy and West Germany), we use the approach developed by Boumezoued (2016) for countries for which the method applies (France and Italy), and provide an extension of the method for West Germany as monthly fertility histories are not sufficient to cover the generations of interest. These mortality tables are crucial inputs to stochastic mortality models forecasting future scenarios, from which the extreme 0,5% longevity improvement can be extracted, allowing for the calculation of the Solvency Capital Requirement (SCR). More precisely, to assess the impact of such anomalies in the Solvency II framework, we use a simplified internal model based on three usual stochastic models to project mortality rates in the future combined with a closure table methodology for older ages. Correcting this bias obviously improves the data quality of the mortality inputs, which is of paramount importance today, and slightly decreases the capital requirement. Overall, the longevity risk assessment remains stable, as well as the selection of the stochastic mortality model. As a collateral gain of this data quality improvement, the more regular estimated parameters allow for new insights and a refined assessment regarding longevity risk.