Wharton Pension Research Council Working Papers

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Working Paper

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Mortality models used to assess longevity risk and retirement funding have been extended to stochastic models with trends and systematic risk. Systematic risk cannot be readily diversified in an insurance pool or pension fund. It is an important factor in assessing solvency and highlighting the tail risk in longevity insurance and pension products. Idiosyncratic risk can be diversified in typical pool sizes, although less effectively at the older ages. Mortality heterogeneity is not usually taken into account in stochastic mortality models. This is a mortality risk that reduces the effectiveness of idiosyncratic mortality risk pooling. Heterogeneity has been modeled with frailty models and more recently with Markov multiple state ageing models. This paper overviews recent developments in models for mortality heterogeneity and uses a model calibrated to both population mortality and health condition data to consider the impact of model risk and heterogeneity in assessing solvency and tail risk for longevity risk products.


The published version of this Working Paper may be found in the 2014 publication: Recreating Sustainable Retirement: Resilience, Solvency, and Tail Risk.

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Copyright/Permission Statement

All opinions, errors, findings, interpretations, and conclusions of this paper represent the views of the authors and not those of the Wharton School or the Pension Research Council. © 2013 Pension Research Council of the Wharton School of the University of Pennsylvania. All rights reserved.


The authors would like to acknowledge the financial support of the Australian Research Council Centre of Excellence in Population Ageing Research (project number CE110001029).

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Economics Commons



Date Posted: 26 June 2019