Mortality in a heterogeneous population - Lee-Carter's methodology

Abstract

The EU Solvency II directive recommends insurance companies to pay more attention to the risk management methods. The sense of risk management is the ability to quantify risk and apply methods that reduce uncertainty. In life insurance, the risk is a consequence of the random variable describing the life expectancy. The article will present a proposal for stochastic mortality modeling based on the Lee and Carter methodology. The maximum likelihood method is often used to estimate parameters in mortality models. This method assumes that the population is homogeneous and the number of deaths has the Poisson distribution. The aim of this article is to change assumptions about the distribution of the number of deaths. The results indicate that the model can get a better match to historical data, when the number of deaths has a negative binomial distribution.