Bringing parametric mortality indexes to practice: a generalized CBD model with stochastic socioeconomic differentials in mortality improvements

Abstract

The concept of CBD mortality indexes was proposed in 2014. While it has been shown that the use of CBD mortality indexes can effectively reduce longevity risk exposures in idealized settings, the risk mitigation potential of such indexes in a more realistic environment, whereby, for example, population basis risk exists, is yet to be investigated. This research gap is addressed in this paper through the development of a generalized CBD model with stochastic socioeconomic differentials in mortality improvements. The proposed model incorporates possible co-integration effects between mortality dynamics of socioeconomic subgroups and the general population, and features a form of coherence that is less restrictive than the typically assumed full coherence. This paper is concluded with various numerical experiments that are conducted to demonstrate the possible bias in hedge effectiveness that may be resulted if the key features of the proposed model are altered.