The Impact of Mortality Risk on the Asset and Liability Management of Insurance Companies

Abstract

In this paper, we investigate the change in mortality rate and its impact on annuity liabilities using the Lee-Carter model. Our findings suggest that the insurer suffers a higher risk of insolvency if macroeconomic factors are used in forecasting mortality rates. A hybrid actuarial model, which consists of both annuity and life insurance, is employed to assess an opportunity for natural hedging. We examine the insurer’s insolvency probability while controlling for impact factors, such as the equity contribution, investment allocation and dividend policy. Insurers – who have both life insurance and annuity liabilities – tend to suffer a balanced, lower financial risk and also tend to be more competitive in the market, thus providing the insurer with a natural hedging opportunity to improve financial stability.