You are here

Longevity Risk Framework

The risk management of longevity is still in its infancy and there are a number of aspects that could improve this:

  • Creation of an industry-standard definition of all the risks behaviours underlying longevity risk.
  • Development of a method to benchmark the output of different risk models used by individual companies using this standard definition.
  • Identification of new ways to reduce risk using this standard definition to identify the intrinsic and avoidable risks.
  • Consideration of the differing longevity risk exposures of different kinds of beneficiaries

The MRSC has published an IFoA Longevity Risk Framework that is intended to address the first bullet.

Summary of Framework

The framework has been designed to achieve the following qualities:

  • The taxonomy should be applicable to both “economic” and “one year” assessments of risk
  • It should differentiate between the systemic population risk (to which all providers are exposed albeit to in different extents) and the specific portfolio risk (to which individual providers may have materially different exposures)
  • It should be applicable to all forms of longevity exposure and longevity risk management approaches

It contains 10 risk components split between those affecting the general population and those that would affect the specific portfolio. The risk components are described in the table below.

 

Risk Component

Definition

Example

Population Risks

Event Risk

Risk of future longevity events occurring at times or with effects not consistent with the assumptions

Reduction in smoker propensity since the 1970s

Population Modelling Risk

Risk that modelling choices or interpretations made regarding the reference population are incorrect (or change) without the data or information changing

Recognition of the cohort effect

Population Mis-estimation Risk

The risk that the reference population assumption mis-estimate the correct level of the population mortality rates

Overestimation of mortality improvement in the late 00s (realised following the 2011 census)

Population Volatility Risk

Risk of short-term deviations in reference population mortality improvements from the underlying level of mortality improvement owing to systemic effects

Poor performance of 2015 flu vaccine

Portfolio Risks

Heterogeneity Risk

The risk that lives with materially different longevity profiles are considered homogenous within a classification group

Lack of behavioural or mental well-being information when determining assumptions

Classification Risk

The risk that lives are misallocated to a classification group  within the mortality basis and utilise assumptions that are not appropriate

Inaccuracy of assumed impairment level based upon individual medical information

Basis Risk

The risk that the assumptions derived are not relevant to the lives in the portfolio (including geared impact on the portfolio exposure to future longevity events)

Uncertainty in relevance of the slowdown in population mortality improvements since 2011

Portfolio Modelling Risk

Risk that modelling choices or interpretations made regarding the portfolio are incorrect (or change) without the data or information changing

Uncertainty in the shape and duration of anti-selection effects

Portfolio Mis-estimation Risk

The risk that portfolio adjustment assumptions derived from external evidence and/or empirical experience  mis-estimate the correct level of the assumption

Limited credibility of experience at older ages

Portfolio Volatility Risk

The risk that even if the classification and the assumptions are correct the specific mortality and morbidity events that occur cause the pattern of future cashflows to change

The number of actual deaths that occur over a period may differ from the expected number of deaths though random variation

Filter or search events

Start date
E.g., 06/08/2021
End date
E.g., 06/08/2021

Events calendar