Can anyone tell me what is the meaning of Random fluctuation risk in chapter 10 of SP2 where it says the 3 risk in mortality assumptions 1) Model risk 2) Parameter risk 3) Random fluctuation risk
Hi Mohit An example might help. Imagine that the mortality rate for the first year of a contract has been correctly modelled as 0.11. Each year the company sells 100 contracts. So they expect 11 deaths each year. However, the actual experience will be random and so in some years they may have 9 or 10 deaths and in other years 12 or 13 deaths. This is random fluctuation risk. Best wishes Mark
