Numerix, a leading independent provider of analytical tools for derivatives valuation and risk management, has added a new ‘Life’ asset class to its products with the introduction of a mortality model. The model aims to help actuaries with stochastic projection of mortality improvements to enable better quantification of longevity risk.
The new model, called the Lee-Carter Stochastic Mortality Model, is designed to enhance capabilities for forecasting, quantifying and aggregating life expectancy within the Numerix Leading Hedge product. This product is Numerix’s enterprise solution for risk management, product design, pricing, scenario generation and hedging of large blocks of insurance guarantees.
Numerix said that understanding mortality and longevity trends is crucial when pricing long-dated guarantees in life insurance, pensions and annuities.
“Numerix’s cross-asset technology within Leading Hedge provides a single unified platform for the most basic to exotic product designs including all types of Variable Annuities, Equity Index Annuities and hedging instruments,” commented Steven R. O’Hanlon, Chief Executive Officer and President of Numerix. “With the stochastic projection of mortality improvements actuaries will be better equipped to quantify the longevity risk associated with underlying life liabilities. Given a clearer picture of gains and losses from mortality improvements at different confidence levels, actuaries can model and price Life guarantees more realistically enabling more informed risk management decisions.”
Numerix’s Hybrid Model framework brings together Interest Rate, Equity, Volatility, Credit and Mortality within a unified, efficient model framework incorporating stochastic processes across multiple asset classes and factors. This allows Numerix customers to estimate and hedge associated risk that is consistent with market-observed behavior.
“As a key investment vehicle designed for retirement savings and life event protection, Life Insurance plays a vital role providing retail and institutional market participants with mortality exposure for protection or as an uncorrelated investment vehicle. Thus it’s critical that Life Insurance providers and investors manage aggregate mortality risk more efficiently,” said Ghali Boukfaoui, VP & Insurance Product Manager at Numerix. “As a major risk in long term insurance products, mortality risk can have material impact on the overall risk profile and liabilities calculation of a product thus should not be ignored compared to other risks. With functionality for generating stochastic mortality rates, actuaries and investors will be able to assess tail risk due to longevity capturing potential exposure due to unexpected mortality scenarios.”
The development of new models which assist with the pricing and quantification of longevity and mortality risks is a key step in developing a hedging market for these core portfolio life risks. By assisting clients in analysing and quantifying the potential impacts of mortality and longevity scenarios, it better equips them to insure, reinsure and hedge these risks and will also help to open up the capital markets as a source of mortality and longevity risk transfer.