Catastrophe Risk in a Stochastic Multi-Population Mortality Model

TL;DR

This paper introduces a flexible stochastic multi-population mortality model that incorporates age-specific mortality shocks and regime-switching, providing more comprehensive risk assessments for actuarial and regulatory purposes.

Contribution

It develops a novel mortality modeling framework combining trend, regime-switching, and shocks, enhancing the realism and robustness of mortality projections.

Findings

Wider prediction intervals for mortality rates compared to existing models

Prediction interval width depends on shock frequency and severity

SCR for mortality risks is compared with Solvency II standards

Abstract

This paper presents an approach to incorporate mortality shocks into mortality projections produced by a stochastic multi-population mortality model. The proposed model combines a decreasing stochastic mortality trend with a regime-switching mechanism that captures age-specific mortality shocks over a lengthy calibration period. The result is a flexible and powerful toolbox that actuaries and risk managers can tailor to their specific needs, risk appetite, or supervisory requirements. We illustrate the proposed mortality model with a case study on projecting Dutch mortality rates. Our findings show that the proposed model generates wider prediction intervals for the mortality rates compared to state-of-the-art stochastic mortality models. The width of these prediction intervals depends on the frequency and severity of the mortality shocks calibrated with the regime-switching model. Furthermore, we compare the solvency capital requirement (SCR) for mortality, longevity and catastrophe risk generated by our toolbox with the SCR under the Solvency II standard model.