The Lee-Carter Stochastic Mortality Model Enables the Forecasting, Quantifying and Aggregating of Mortality Risk for Improved Pricing and Risk Management
Numerix, the leading provider of cross-asset analytics for derivatives valuations and risk management, today announced the availability of a new “Life” asset class with the introduction of the Lee-Carter Stochastic Mortality Model. The new model will enhance capabilities for forecasting, quantifying and aggregating life expectancy within Numerix Leading Hedge, an enterprise solution for the risk management, product design, pricing, scenario generation and hedging of large blocks of Insurance guarantees. Crucial in the pricing of long-dated guarantees in Life Insurance, pensions and annuities, the stochastic projection of mortality improvements will enable actuaries to better quantify longevity risk.
“Numerix’s cross-asset technology within Leading Hedge provides a single unified platform for the most basic to exotic product designs including all types of Variable Annuities, Equity Index Annuities and hedging instruments,” said Steven R. O’Hanlon, Chief Executive Officer and President of Numerix. “With the stochastic projection of mortality improvements actuaries will be better equipped to quantify the longevity risk associated with underlying life liabilities. Given a clearer picture of gains and losses from mortality improvements at different confidence levels, actuaries can model and price Life guarantees more realistically enabling more informed risk management decisions.”
Numerix’s Hybrid Model framework allows for the production of consistent scenarios among multiple risk factors while simultaneously internally calibrating correlations in multi-factor models. By bringing together Interest Rate, Equity, Volatility, Credit and Mortality within a unified, efficient model framework that incorporates stochastic processes across multiple asset classes and factors, customers can estimate and hedge associated risk that is consistent with market-observed behavior.
“As a key investment vehicle designed for retirement savings and life event protection, Life Insurance plays a vital role providing retail and institutional market participants with mortality exposure for protection or as an uncorrelated investment vehicle. Thus it’s critical that Life Insurance providers and investors manage aggregate mortality risk more efficiently,” said Ghali Boukfaoui, Vice President & Insurance Product Manager at Numerix. “As a major risk in long term insurance products, mortality risk can have material impact on the overall risk profile and liabilities calculation of a product thus should not be ignored compared to other risks. With functionality for generating stochastic mortality rates, actuaries and investors will be able to assess tail risk due to longevity capturing potential exposure due to unexpected mortality scenarios.”