Diversification of longevity and mortality risk

There is real value for an insurer in performing stochastic modeling with volatile mortality assumptions when pricing, setting deterministic margins, determining economic capital, and determining its optimal mix of business. This case study explores relevant questions related to margins using a simple combination of life insurance and payout annuity products by applying stochastic projections of future mortality rates. It also compares percentile values from the stochastic projections to results using deterministic projections and margins. In addition, the study demonstrates the relative diversification benefit of the longevity exposure from the annuity product along with the mortality exposure of the life insurance product.