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Recreating Sustainable RetirementResilience, Solvency, and Tail Risk$
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Olivia S. Mitchell, Raimond Maurer, and P.Brett Hammond

Print publication date: 2014

Print ISBN-13: 9780198719243

Published to Oxford Scholarship Online: December 2014

DOI: 10.1093/acprof:oso/9780198719243.001.0001

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Model Risk, Mortality Heterogeneity, and Implications for Solvency and Tail Risk

Model Risk, Mortality Heterogeneity, and Implications for Solvency and Tail Risk

(p.113) Chapter 7 Model Risk, Mortality Heterogeneity, and Implications for Solvency and Tail Risk
Recreating Sustainable Retirement

Michael Sherris

Qiming Zhou

Oxford University Press

Mortality models used to assess longevity risk and retirement funding have been extended to stochastic models with trends and systematic risk. Systematic risk cannot be readily diversified in an insurance pool or pension fund. It is an important factor in assessing solvency and highlighting the tail risk in longevity insurance and pension products. Idiosyncratic risk can be diversified in typical pool sizes, although less effectively at older ages. Mortality heterogeneity is not usually taken into account in stochastic mortality models, though it reduces the effectiveness of idiosyncratic mortality risk pooling. Heterogeneity has been modeled with frailty models and more recently with Markov multiple-state ageing models. This chapter provides an overview of recent developments in models for mortality heterogeneity, using a model calibrated to both population mortality and health condition data to consider the impact of model risk and heterogeneity in assessing solvency and tail risk for longevity risk products.

Keywords:   Mortality risk models, heterogeneity, frailty model, annuity fund values, systematic risk, mortality distribution

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