Although insurers now reflect volatility in asset return assumptions when they determine capital requirements, it is not commonplace to examine the effect of volatility on liability assumptions when performing stochastic analysis. Factor-based capital models that ignore the volatility in mortality trends have the potential to understate future economic capital trends. However, the use of a principle-based approach that uses stochastic techniques and dynamic assumptions for mortality can overcome this problem. This article examines a case study that compares the capital requirement generated by a statutory risk-based capital formula with that produced by a principle-based model using dynamic assumptions for mortality.
