The American Risk and Insurance Association presents the Robert I. Mehr Award each year for the paper published ten years ago in The Journal of Risk and Insurance that has best stood the test of time. The evaluation of the articles is made by the editorial board of JRI.
The recipients of the 2016 Mehr Award are Andrew J. G. Cairns, David Blake and Kevin Dowd for “A Two-Factor Model for Stochastic Mortality with Parameter Uncertainty: Theory and Calibration.”
In this article, we consider the evolution of the post-age-60 mortality curve in the United Kingdom and its impact on the pricing of the risk associated with aggregate mortality improvements over time: so-called longevity risk. We introduce a two-factor stochastic model for the development of this curve through time. The first factor affects mortality-rate dynamics at all ages in the same way, whereas the second factor affects mortality-rate dynamics at higher ages much more than at lower ages. The article then examines the pricing of longevity bonds with different terms to maturity referenced to different cohorts. We find that longevity risk over relatively short time horizons is very low, but at horizons in excess of ten years it begins to pick up very rapidly.