Stochastic mortality, macroeconomic risks, and life insurer solvency

Motivated by a recent demographic study establishing a link between macroeconomic fluctuations and the mortality index k t in the lee–carter model, we develop a dynamic asset-liability model to assess the impact of macroeconomic fluctuations on the solvency of a life insurance company. Liabilities in this stochastic simulation framework are driven by a gdp-linked variant of the lee–carter mortality model. Furthermore, interest rates and stock prices react to changes in gdp, which itself is modelled as a stochastic process. Our simulation results show that insolvency probabilities are significantly higher when the reaction of mortality rates to changes in gdp is incorporated.