by Elisa Luciano, Jaap Spreeuw and Elena Vigna; WP CeRP 58/07
Abstract
Stochastic mortality, i.e. modelling death arrival via a jump process with stochastic intensity, is gaining increasing reputation as a way to represent mortality risk. This paper represents a first attempt to model the mortality risk of couples of individuals, according to the stochastic intensity approach. We extend to couples the Cox processes set up, namely the idea that mortality is driven by a jump process whose intensity is itself a stochastic process, proper of a particular generation within each gender. Dependence between the survival times of the members of a couple is captured by an Archimedean copula.
We also provide a methodology for fitting the joint survival function by working separately on the (analytical) copula and the (analytical) margins. First, we calibrate and select the best fit copula according to the methodology of Wang and Wells (2000b) for censored data. Then, we provide a sample-based calibration for the intensity, using a time-homogeneous, non mean-reverting, affine process: this gives the marginal survival functions. By coupling the best fit copula with the calibrated margins we obtain a joint survival function which incorporates the stochastic nature of mortality improvements. Several measures of time dependent association can be computed out of it.
We apply the methodology to a well known insurance dataset, using a sample generation. The best fit copula turns out to be a Nelsen one, which implies not only positive dependency, but dependency increasing with age.
April 2007