Chapter VI: Mortality and Longevity Markets

Question 1

Definition of the extreme mortalility bond ?

Answer 1

Financial instruments whose values are predominantly driven by extreme mortality risk. They are designed to hedge sponsors against sharp increases in mortality rates.

Question 2

Which factors affect the quality of mortality projections?

Answer 2

Data adequacy and reliability
Categorization of groups and underwriting standards may change over the years
This affects the reliability of historical mortality tables for the prediction of future means

General trends
 In most developed countries, mortality rates continue to experience steady reductions
 Yet, projecting this trend into the future is not as easy as it may seem (must understand causes)

Random statistical fluctuation
 Variation around the mean driven by the pool size and the homogeneity of the lives within it
 Reinsurers and large primary insurers with sizeable life insurance pools are less affected

Unpredictability of extreme events
 Extreme events are by their very nature difficult/impossible to model based on historical data
 Historical scenarios would have a different impact today and many potential causes are new

Question 3

The anatomy of extreme mortality risk models ?

Answer 3

1) Pandemic Risk: serious infectious desease
2) Baseline Risk Module: variation around the mean
3) Terrorism Risk Module: potential terrorist attacks