A Method of Hedging Mortality Rate Risks in Endowment Product Development

Forecasting mortality rate changes in the future is important and necessary for insurance businesses. An interesting observation is that mortality rates for a few age groups have improved recently and that other mortality rate risks may exist. If the life table constructed from a mortality model, which predicts mortality rates lower than those actually experienced by the life insurance policy holders, then the company will face losses from the sales of life insurance contracts. As a hedging strategy, the insurance company may promote the sale of polices, such as annuities or pure endowments, to offset the losses from the life insurance sales. We present a method of hedging mortality rate risks for the development of endowment policies using the hedge ratios of pure endowment in order to offset the losses from term life insurance. We also demonstrate a hedging strategy using the stochastic force of a mortality model, which is resulted from Malliavin calculus.