This paper proposes a partial internal model for longevity risk within the Solvency 2 framework. The model is closely linked to the mechanisms associated with the Danish longevity benchmark, where the underlying mortality intensity and the trend is estimated yearly based on mortality experience from the Danish life and pension insurance sector and on current data from the entire Danish population. Within this model, we derive a new estimate for the 99.5 % percentile for longevity risk, which differs from the longevity stress of 20 % from the standard model. The new stress explicitly reflects the risk associated with unexpected changes in the underlying population mortality intensity on a one year horizon and with a 99.5 % confidence level. In addition, the model contains a component, which quantifies the non-systematic longevity risk. This last component depends on the size of the portfolio.

(Joint work with Søren Fiig Jarner, chief Analyst, ATP, and Adjunct Professor, University of Copenhagen)

Key words and phrases:
Solvency 2, mortality, longevity stress, Danish longevity benchmark, systematic and unsystematic risk