Information Matrix

If you are over forty, the title of this blog will call to mind an iconic, sometimes disturbing, television series of the same name from 1990.  If you clicked on the link expecting murder, surreal horror and an undercurrent of sleaze, however, then this posting is as far away from all that as you are ever likely to get.

So what will the winner of the battle of the UK General Election be able to tell us about projection modelling? I'm not talking about the parties who will gain a share of power after May 7th, but which of the polling organisations will most closely forecast the results.

Academics lay great store by anonymous peer review and in openly publishing their results.  There are good reasons for this — anonymous peer review allows expert third parties (usually two) to challenge assumptions without fear of retribution, while open publishing allows others to test things and find their limitations. 

During the public discussions of our paper on value-at-risk for longevity trend risk, one commentator asked for a fuller presentation of VaR capital requirements by age. In the paper, as with our introductory overview, we used age 70 as a representative average age of an annuity portfolio.

There are several ways of looking at longevity trend risk, as covered in our recent seminar. However, regardless of how you choose to look at this risk, there are some pitfalls to watch out for.

Longevity trend risk is different from most other risks an insurer faces because the risk lies in the long-term trajectory taken by mortality rates. This trend unfolds over many years as an accumulation of small changes.

Insurers need to have internal models for their major risks. Indeed, both the Individual Capital Assessment (ICA) regime in the UK and the pending Solvency II rules in the EU demand that insurers have good models for their risks.

I wrote earlier about survivor forwards as a means of transferring longevity risk.  One natural question for investors to ask is: what is the likelihood of loss exceeding a given amount?

Investors in longevity risk are particularly interested in extremes — they want to know the maximum loss they are likely to bear for a given probability.  Reinsurers can be even more strongly interested in extremes, especially if they have written stop-loss reinsurance.