Considering Stochastic Mortality in Pricing Variable Annuities: Applications of the Lee Carter Model

This research paper, written by Chao Liang, FSA and Numerix Insurance Product Specialist, examines how the Lee Carter Model can be beneficial when pricing variable annuities. As a major risk in long term insurance products, mortality risk has material impact on liabilities calculation. Incorporating the numerical method based on Lee Carter model to the hybrid framework makes it possible to quantify all major risks associated with insurance products, and is especially beneficial for those bearing long term mortality/longevity risks, such as GMWB, annuities, pensions and other long term insurance products.

The highlights include:

• Introduction to the Lee Carter Model
• Deterministic vs. Stochastic Mortality Rates
• How Stochastic Mortality Analysis Helps in Pricing
• Potential Gain/ Loss Based on Deterministic Mortality Rates