Biometric worst-case scenarios for multi-state life insurance policies

It is common actuarial practice to calculate premiums and reserves under a set of biometric assumptions that represent a worst-case scenario for the insurer. The new solvency regime of the European Union (Solvency II) also uses worst-case scenarios for the calculation of solvency capital requirements for life insurance business. Surprisingly, the actuarial literature so far offers no exact method for the construction of biometric scenarios that let premiums and reserves be always on the safe side with respect to a given confidence band for the biometric second-order basis. The present paper partly fills this gap by introducing a general method that allows one to construct such scenarios for homogenous portfolios of life insurance policies. The results are especially informative for life insurance policies with mixed character (e.g. survival and occurrence character). Two examples are given that illustrate the new method, demonstrate its usefulness for the calculation of premiums and reserves, and show how the new approach could improve the calculation of biometric solvency reserves for Solvency II.