Risk-sharing rules for mortality pooling products with stochastic and correlated mortality rates

Abstract Risk-sharing rules have been applied to mortality pooling products to ensure these products are actuarially fair and self-sustaining. However, most of the existing studies on the risk-sharing rules of mortality pooling products assume deterministic mortality rates, whereas the literature on mortality models provides empirical evidence suggesting that mortality rates are stochastic and correlated between cohorts. In this paper, we extend existing risk-sharing rules and introduce a new risk-sharing rule, named the joint expectation (JE) rule, to ensure the actuarial fairness of mortality pooling products while accounting for stochastic and correlated mortality rates. Moreover, we perform a systematic study of how the choice of risk-sharing rule, the volatility and correlation of mortality rates, pool size, account balance, and age affect the distribution of mortality credits. Then, we explore a dynamic pool that accommodates heterogeneous members and allows new entrants, and we track the income payments for different members over time. Furthermore, we compare different risk-sharing rules under the scenario of a systematic shock in mortality rates. We find that the account balance affects the distribution of mortality credits for the regression rule, while it has no effect under the proportional, JE, and alive-only rules. We also find that a larger pool size increases the sensitivity to the deviation in total mortality credits for cohorts with mortality rates that are volatile and highly correlated with those of other cohorts, under the stochastic regression rule. Finally, we find that risk-sharing rules significantly influence the effect of longevity shocks on fund balances since, under different risk-sharing rules, fund balances have different sensitivities to deviations in mortality credits.