IAI Actuarial Core Principles · Risk Modelling and Survival Analysis · Mortality projection

In a stochastic mortality projection model, which statement best describes the difference between process risk and parameter risk?

Process risk is random variation in actual deaths when the true rates are known, whereas parameter risk is uncertainty about the parameter values estimated from limited data. Only process risk diversifies with a larger portfolio, while parameter risk affects all lives together.

1. AProcess risk is the random variation in actual deaths even if the true mortality rates were known; parameter risk is uncertainty about the values of the model parameters estimated from limited dataCorrect
2. BProcess risk arises from choosing the wrong model family; parameter risk arises from random variation in the number of deaths in a year
3. CProcess risk is the risk that mortality improvements stop; parameter risk is the risk that interest rates change
4. DProcess risk can be diversified by using more parameters; parameter risk can be removed by using a larger portfolio
5. Process risk and parameter risk are the same, differing only in the time horizon of the projection