in Kleinow & Richards (2016, Table 5) we noted a seeming conundrum: the best-fitting ARIMA model for the time index in a Lee-Carter model also produced much higher value-at-risk (VaR) capital requirements for longevity trend risk. How could this be?
At our seminar earlier this year I looked at the validity of assumptions underpinning some stochastic projection models for mortality. I looked at the assumption of parameter independence in forecasting, and examined whether this assumption was borne out by the data. It transpires that the assumption of independence is a workable assumption for some models, but not for others. This has important consequences in a Solvency II context — an internal model must be shown to have assumptions grounded in fact.