The danger or possibility that a portfolio of a life insurance company will suffer a drainage of resources from mortality exceeding expected levels. Mortality risk is that type of risk arising from increases in liability cash flows due to mortality (incidence of death) of the insured at rates beyond established estimations. For each life insurance product, and for each portfolio of products that have mortality risk exposure, an insurer calculates factors related to proportion, trend, volatility and catastrophe risk.
Mortality risk is a key risk factor for life insurance companies and can have a significant impact on its overall risk. By composition, mortality risk consists of multiple subcategories, including unsystematic risk, adverse selection, and systematic risk. Furthermore, companies undertaking hedging for risk management purposes may be exposed to the so-called basis risk (in case of hedging anther type of risk known as longevity risk).
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