Description: This report is sponsored by the Society of Actuaries in collaboration with Ernst & Young. It examines the application of stochastic modeling techniques to non-market risks facing the life insurance industry.

Description: This paper introduces a rich stochastic modeling framework for understanding risks in multiple-decrement contracts. The example in the paper is a 20-year Term insurance contract. Not only are mortality and lapsation considered stochastic, but the parameters governing them are. For example, mortality risk is composed of four risk elements, including error generated in the underwriting process, volatility around the best estimate, catastrophic events that impact mortality, and the trend in mortality improvement or deterioration. When stochastically modeled, the relative contribution and risk profile of each risk element can be evaluated. Generating stochastic mortality results provides a distribution of results that an organization faces and the severity and incidence of the tail events.

Description: This article looks at stochastic techniques actuaries can use to quantify the non-market risks in insurance products and how stochastic techniques can be used in the evaluation of reinsurance arrangements.