Annuity Risk Management: Mortality ICA Analysis
Document ID: 2007-766 (previously 2007/002)
Published on: 1st March 2007
Author: Delme Pritchard, Colin Wilson
The main risk drivers contributing to ICA capital requirements for annuity business are longevity risk, credit risk (where backing funds are invested in credit risky assets) and interest rate risk. The attached report focuses on the contribution to the ICA from longevity risk analysed using B&H's stochastic mortality model. The particular focus of the report is on comparing and reconciling the capital differences arising in a case study from the following ICA definitions:
- One- year VaR ICA
- Run-off ICA
- Instantaneous mortality stress
The report also looks at how the run-off approach can be used in inform a one-year VaR ICA. Overall, this study does raise the question of whether a 1-year VaR type approach to ICA when looking at long-term, non-market risks, such as longevity risk, is the most appropriate method.
