What actuarial risks dominate a life insurance portfolio?

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AcadiFi · Accepted Answer

Life insurance actuarial risk decomposes into four drivers. Mortality risk affects term and whole life — if actual deaths exceed pricing assumptions, claims spike. Longevity risk is the mirror image: annuity and pension portfolios lose when policyholders outlive expectations. Lapse risk cuts both ways — a block of universal life with high surrender values can bleed capital if rising rates trigger disintermediation, while a term block actually loses profitability from under-lapsation. Expense risk captures inflation in policy administration. A carrier like Meridian Life with $8B of reserves might run a mortality stress of +15% q(x), a longevity stress of -20% mortality improvement, and a mass-lapse stress of 40% surrenders in one year. The interaction matters: a pandemic scenario raises mortality (hurting term) but simultaneously lowers longevity liabilities (helping annuities), creating natural hedges in diversified writers. Solvency II's LTG (long-term guarantee) measures, volatility adjustments, and matching adjustments attempt to recognize this stability. Actuaries use stochastic ESG (economic scenario generator) models to price embedded guarantees — minimum crediting rates, GMDBs, and GLWBs behave like long-dated options on interest rates and equity. See our course on life insurance capital modeling for worked examples.

What actuarial risks dominate a life insurance portfolio?

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