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Abstract This study addresses the assessment of capital requirements in life insurance for idiosyncratic demographic risks arising from mortality and longevity in compliance with the Solvency II framework. A closed-formula methodology, using a cohort-based risk theoretical approach, is introduced to properly capture the volatility associated with policyholder deaths or survivals. This approach not only accounts for portfolio size effects but it also considers the impact of variability in sums insured within cohorts and coverage types with an additional specific address to distribution tails. The proposed methodology offers a viable alternative within the Solvency II context, addressing limitations identified in previous studies for the Standard Formula nowadays in force. Focusing only on the diversifiable part of demographic risk, the approach considers company’s specific parameters through a risk-based formula, as opposed to a simple scenario approach with demographic stress on the Best Estimate of underlying contracts valid for the whole business. Numerical results show its accuracy in approximating capital requirements for a large range of life insurance contracts.
Clemente et al. (Sat,) studied this question.