|
Advantages provided by `large' portfolio sizes in respect of the risk of random
fluctuations justify, to some extent, the traditional deterministic approach to mortality, in
life insurance calculations. Actually, adopting a deterministic approach to actuarial
valuations (i.e., using only expected values in calculating premiums and reserves) is, to some
extent, underpinned by the nature of the insurance process, which consists of
`transforming' individual risks through aggregation, thus, lowering the relevant impact.
However, this justification can only be accepted under the assumption that just the
risk of random fluctuations in the mortality of insured lives is allowed for. Conversely,
other sources of randomness should also be recognized, and hence the existence of
risk components other than random fluctuations should be accounted for. When dealing
with life annuities (and, in general, with long-term living products), special attention
should be devoted to the risk of systematic deviations arising from the uncertainty
in representing the future mortality patterns.
Solvency targets and the assessment of the consequent capital requirements,
according to a sound risk management approach, clearly witness the need for analyzing all
sources of risk and the relevant components. In this regard, it is interesting to note the
progressive shift from simple (and, in a modern perspective, rather simplistic) regulatory
requirements, based on compact shortcut formulae to more complex calculation structures. The
possible use of internal models, which can capture the real risk profile of an insurance
company, is a recent, and so far, probably the most important step in this process. An
interesting review of the development of solvency requirements (also according to the
historical perspective) is provided by
Sandstro..m (2006). |
