Assessing the Solvency Risk of Insurance Portfolios via a Continuous Time Cohort Model

The paper describes a model that evaluates the solvency of a portfolio of assets and liabilities of an insurer subject to longevity risk and financial risks. Liabilities are evaluated at fair-value. Interest-rate risk can affect both assets and liabilities. Longevity risk is described via a continuous-time cohort model. We evaluate the impact of different investment and hedging strategies on the characteristics of the funding ratio of run-off portfolios at different time horizons. Numerical simulations, calibrated to UK historical data, show that systematic longevity risk is particularly important in the long-run and needs to be hedged.We highlight that portfolio size, investment choices and solvency requirements are deeply interconnected. Natural hedging techniques can effectively reduce the required solvency buffer when interest-rate risk is perfectly hedged