Unexpected changes in morality rate are unavoidable economic threats for society as well as for individuals.
This thesis addresses issues of fundamental importance for financial protection against longevity and mortality risks.
Using the general procedure (GP), I first construct a stochastic mortality model that includes all the age-specific risk factors for forecasting mortality. Here, I use South Korean male mortality data for ages 1 to 79, from
1983 to 2010. Then, the model produced by the GP is compared with seven existing stochastic mortality models, and assessed in terms of the Bayesian Information Criterion (BIC) and mean absolute percentage error (MAPE). Based on the results, the model produced by the GP consistently outperforms other models, implying that
the GP is able to extract the optimal risk factors for the projection of age-specific mortality rates.
Next, I address counterparty credit risk in q/S-forward contracts between annuity providers and banks. In particular, I illustrate a framework for pricing credit valuation adjustments (CVA) for q/S-forwards using stochastic mortality models, and then examine the effectiveness of q-forwards to hedge against counterparty default risk. I ascertain that the banks can achieve the same Longevity Risk Reduction (LRR) by choosing an optimal number of q-forwards, regardless of the counterparty's credit rating.
Finally, I study continuous-time optimal life insurance purchase, consumption, and portfolio management strategies for a wage earner subject to mortality risk via Markov chain approximation techniques. In this framework,
financial market parameters are governed by a regime-switching process. The numerical results show the significant effect of regime switching in the optimal strategies, indicating that (1) the optimal consumption with the possibility of regime switching into a better (worse) investment opportunity state are larger (less) than those
in the absence of regime switching, (2) the effect of regime switching on risky investments is negligible, and (3) the optimal insurance purchases with the possibility of regime switching into a better (worse) investment opportunity state are larger (less) than those in the absence of regime switching.
