Stochastic Mortality,Macroeconomic Risks, andLife Insurer Solvency

Motivated by a recent demographic study establishing a link betweenmacroeconomic fluctuations and the mortality index kt in the Lee-Cartermodel, we assess the impact of macroeconomic fluctuations on the solvencyof a life insurance company. Liabilities in our stochastic simulationframework are driven by a GDP-linked variant of the Lee-Carter mortalitymodel. Furthermore, interest rates and stock prices are allowed to react tochanges in GDP, which itself is modeled as a stochastic process. Our resultsshow that insolvency probabilities are significantly higher when the reactionof mortality rates to changes in GDP is incorporated.