Read Books Online and Download eBooks, EPub, PDF, Mobi, Kindle, Text Full Free.
How Effective Is Natural Hedging Of Longevity Risk
Download How Effective Is Natural Hedging Of Longevity Risk full books in PDF, epub, and Kindle. Read online How Effective Is Natural Hedging Of Longevity Risk ebook anywhere anytime directly on your device. Fast Download speed and no annoying ads. We cannot guarantee that every ebooks is available!
Book Synopsis How Effective is Natural Hedging of Longevity Risk? by : Silvan Bienz
Download or read book How Effective is Natural Hedging of Longevity Risk? written by Silvan Bienz and published by . This book was released on 2016 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The consideration of longevity risk is increasingly important to insurance companies and pension plans due to the demographic development. In recent years, the capital market has developed a variety of longevity risk related securities. As the capital market solutions are just about to emerge, the only viable longevity risk management strategy to date remains natural hedging. Authors with different points of view are debating about the effectiveness of natural hedging in the academic literature. Therefore, this work tries to add to the discussion by examining natural hedging in comparison to longevity bonds and survivor swaps. This comparison is achieved through a comprehensive theoretical discussion and a numerical analysis. Hereby, longevity risk is assessed by modelling a mortality shock on a fictitious insurance portfolio and analysing the financial implications thereof under the three longevity risk management solutions. This paper demonstrates that natural hedging can provide a partial hedge against longevity risk. The combination of our analysis' result and estimates in the academic literature leads to the conclusion that natural hedging is semi-effective. In comparison to longevity bonds and survivor swaps, natural hedging proves less effective as these capital market instruments are able to provide a perfect hedge. However, natural hedging convinces with the highest level of practicability.
Book Synopsis Single- and Cross-Generation Natural Hedging of Longevity and Financial Risk by : Elisa Luciano
Download or read book Single- and Cross-Generation Natural Hedging of Longevity and Financial Risk written by Elisa Luciano and published by . This book was released on 2015 with total page 39 pages. Available in PDF, EPUB and Kindle. Book excerpt: This article provides natural hedging strategies for life insurance and annuity businesses written on a single generation or on different generations in the presence of both longevity and interest-rate risks. We obtain closed-form solutions for delta and gamma hedges against cohort-based longevity risk. We exploit the correlation between the mortality intensities of different generations and hedge the longevity risk of one cohort with products on other cohorts. An application with UK data on survivorship and bond dynamics shows that hedging is effective, even when rebalancing is infrequent.
Book Synopsis Longevity Risk and Natural Hedge Potential in Portfolios of Life Insurance Products by : Ralph Stevens
Download or read book Longevity Risk and Natural Hedge Potential in Portfolios of Life Insurance Products written by Ralph Stevens and published by . This book was released on 2011 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis A Simple Hedge for Longevity Risk and Reimbursement Risk Using Research-Backed Obligations by : Roger Stein
Download or read book A Simple Hedge for Longevity Risk and Reimbursement Risk Using Research-Backed Obligations written by Roger Stein and published by . This book was released on 2016 with total page 39 pages. Available in PDF, EPUB and Kindle. Book excerpt: Longevity risk is the risk that the promised recipient of lifetime cashflows ends up living much longer than originally anticipated, thus causing a shortfall in funding. A related risk, reimbursement risk is the risk that providers of health insurance face when new and expensive drugs are introduced and the insurer must cover their costs. Longevity and reimbursement risks are particularly acute in domains in which scientific breakthroughs can increase the speed of new drug development. An emerging asset class, research-backed obligations or RBOs (cf., Fernandez et al., 2012), provides a natural mechanism for hedging these risks: RBO equity tranches gain value as new life- extending therapies are developed and do so in proportion to the number of successful therapies introduced. We use the stylized case of annuity underwriting to show how RBO equity could be used to hedge some forms longevity risk on a retirement portfolio. Using the same framework, we then show how RBO securities may be used to hedge a much broader class of reimbursement risks faced by health insurance firms. We demonstrate how to compute hedge ratios to neutralize specific exposures. Although our analytic results are stylized, our simulation results suggest substantial potential for this asset class to reduce financial uncertainty for those institutions exposed to either longevity or reimbursement risks. For example, our simulation results indicate that the correlation between the return on RBO equity and the reimbursement shortfall for a health insurer is about 0.66 under reasonable assumptions. Even under extremely conservative assumptions, this correlation is still 0.34, suggesting that RBO equity offers substantial hedging benefits, producing more favorable outcomes in about 87% of scenarios.
Book Synopsis Natural Hedging of Life and Annuity Mortality Risks by : Samuel H. Cox
Download or read book Natural Hedging of Life and Annuity Mortality Risks written by Samuel H. Cox and published by . This book was released on 2016 with total page 27 pages. Available in PDF, EPUB and Kindle. Book excerpt: The values of life insurance and annuity liabilities move in opposite directions in response to a change in the underlying mortality. Natural hedging utilizes this to stabilize aggregate liability cash flows. We find empirical evidence that suggests that annuity writing insurers who have more balanced business in life and annuity risks also tend to charge lower premiums than otherwise similar insurers. This indicates that insurers who have a natural hedge have a competitive advantage. In addition, we show how a mortality swap might be used to provide the benefits of natural hedging.
Book Synopsis Managing Life Insurer Risk and Profitability by : Andy Wong
Download or read book Managing Life Insurer Risk and Profitability written by Andy Wong and published by . This book was released on 2013 with total page 21 pages. Available in PDF, EPUB and Kindle. Book excerpt: Changing demographics creates the potential for the expansion of existing and new products to manage longevity risk. Life annuities address this risk, yet these annuity product markets are thin. Insurers are concerned about the long term risks associated with these longevity products and capital requirements. Life insurers also offer life insurance products, whole-of-life and term, that provide an opportunity to offset longevity risks. This can allow capital efficient longevity risk products to be sold as part of a product portfolio. Natural hedging, or the offsetting of risks in life insurance and annuity business, provides a way of managing capital efficiently as well as improving profitability. This paper uses stochastic mortality and interest rate models to assess life and annuity capital requirements and quantify the benefits of natural hedging taking into account relative profit loadings on products. The benefits of offering longevity products, in terms of capital requirements, as well as the importance of the type of life insurance products offered are illustrated using standard life and annuity products. The impact of capital requirements, such as solvency II with a one-year horizon, are considered and compared to multiple period risk measures to confirm the results hold for regulatory capital requirements.
Book Synopsis Natural Hedging Using Multi-population Mortality Forecasting Models by : Shuang Chen
Download or read book Natural Hedging Using Multi-population Mortality Forecasting Models written by Shuang Chen and published by . This book was released on 2014 with total page 57 pages. Available in PDF, EPUB and Kindle. Book excerpt: No mortality projection model can capture future mortality changes accurately so that the actual mortality rates are different from the projected ones. The movement of mortality rates has oppositive impacts on the values of life insurance and annuity products, which creates a chance of nature hedge for both life insurer and annuity provider. A life insurer and an annuity provider can swap their life insurance and annuity business for each other to form their own portfolios for natural hedge. This project is mainly focused on determining the weights of a portfolio of life insurance and annuity products by minimizing the variance of the loss function of the portfolio to reduce mortality and longevity risks for each of the life insurer and the annuity provider. Four Lee-Carter-based models are applied to model the co-movement of two populations of life insurance and annuity insureds, and then determine the weights for comparisons. The block bootstrap method, a model-/parameter-free approach, is also adopted with numerical illustrations to compare the hedging performances among the four models.
Book Synopsis Natural Hedging of Mortality Risks and Product Design by : 黃芳文
Download or read book Natural Hedging of Mortality Risks and Product Design written by 黃芳文 and published by . This book was released on 2016 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Immunization and Hedging of Longevity Risk by : Changyu Liu
Download or read book Immunization and Hedging of Longevity Risk written by Changyu Liu and published by . This book was released on 2015 with total page 39 pages. Available in PDF, EPUB and Kindle. Book excerpt: Pension funds and life insurers offering annuities hold long term liabilities linked to longevity. Risk management of life annuity portfolios aims to immunize or hedge both interest rate and mortality risks. Standard fixed interest duration-convexity hedging must be adapted to allow for both interest rate and longevity risk. We develop an immunization approach along with a delta-gamma based approach allowing for both risks incorporating models for mortality and interest rate risk. The immunization and hedge effectiveness of fixed-income coupon bonds, annuity bonds, as well as longevity bonds, is compared and assessed using simulations of portfolio surplus outcomes for an annuity portfolio. Fixed-income annuity bonds can more effectively match cash flows and provide additional hedge effectiveness over coupon bonds. Longevity bonds, including deferred longevity bonds, reduce risk significantly compared to coupon and annuity bonds, reflecting the long duration of the typical life annuity and the exposure to longevity risk. Longevity bonds are shown to be effective in immunizing surplus over short and long horizons. Delta gamma hedging is shown to only be effective over short horizons.
Book Synopsis Longevity Hedge Effectiveness Using Socioeconomic Indices by : Malene Kallestrup Lamb
Download or read book Longevity Hedge Effectiveness Using Socioeconomic Indices written by Malene Kallestrup Lamb and published by . This book was released on 2022 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper evaluates socioeconomic basis risk in longevity hedging. Using data for a full population stratified into socioeconomic groups, we explore the benefits and costs of two alternative hedging strategies, with and without basis risk, in the capital market. The benefit of the longevity hedge is represented by the risk reduction in the variability of a life annuity, whereas the cost is the notional amount of hedging contracts times the actuarial risk premium. We find that hedging is more cost-effective for the annuity provider when basis risk is eliminated. Moreover, it allows for a higher degree of hedge effectiveness at a cost that is equivalent to a hedge where basis risk is present. Finally, the yearly expenses related to hedging longevity risk requires, at most, an extra added rate of return of no more than 0.2%.
Book Synopsis A Study on Longevity Risk Hedging in the Presence of Population Basis Risk by : Kenneth Qian Zhou
Download or read book A Study on Longevity Risk Hedging in the Presence of Population Basis Risk written by Kenneth Qian Zhou and published by . This book was released on 2015 with total page 87 pages. Available in PDF, EPUB and Kindle. Book excerpt: Longevity risk refers to uncertainty surrounding the trend in human life expectancy. Standardized hedging instruments that are linked to broad-based mortality indexes can be used to offload longevity risk from pension plans and annuities. However, hedges that are based on such instruments are subject to population basis risk, which arises from the difference in mortality improvements between the hedger's population and the reference population to which the hedging instruments are linked. This thesis attempts to address some issues that are related to longevity risk hedging in the presence of population basis risk. In the first chapter, a graphical risk metric is proposed to intuitively measure population basis risk, which is believed to be a major obstacle to market development. It allows market participants to not only visually evaluate the extent of population basis risk, but also determine the most appropriate reference population. Compared to existing population basis risk metrics which are mostly numerical, the proposed graphical risk metric is more informative in that it captures more aspects of population basis risk. Along with the existing numerical risk metrics, the proposed graphical risk metric may help hedgers better understand population basis risk and hence make their risk management decisions. In the second chapter, the feasibility of dynamic longevity hedging with standardized hedging instruments is studied. To this end, the dynamic hedging strategy developed by Cairns (2011) is generalized to incorporate the situation when the hedger's population and the reference population are different. The empirical results indicate that dynamic hedging can effectively reduce the longevity risk exposures of a typical pension plan, even if population basis risk is taken into account. Further, by considering data from a large group of national populations, it is found that population basis risk and small sample risk can possibly be diversified across different hedgers. Hedgers may therefore be able to completely eliminate their longevity risk exposures by removing the underlying trend risk with a dynamic index-based hedge and transferring the residual risks through a reinsurance mechanism.
Book Synopsis Longevity Risk Management by : Kenneth Qian Zhou
Download or read book Longevity Risk Management written by Kenneth Qian Zhou and published by . This book was released on 2019 with total page 169 pages. Available in PDF, EPUB and Kindle. Book excerpt: Longevity risk management is becoming increasingly important in the pension and life insurance industries. The unexpected mortality improvements observed in recent decades are posing serious concerns to the financial stability of defined-benefit pension plans and annuity portfolios. It has recently been argued that the overwhelming longevity risk exposures borne by the pension and life insurance industries may be transferred to capital markets through standardized longevity derivatives that are linked to broad-based mortality indexes. To achieve the transfer of risk, two technical issues need to be addressed first: (1) how to model the dynamics of mortality indexes, and (2) how to optimize a longevity hedge using standardized longevity derivatives. The objective of this thesis is to develop sensible solutions to these two questions. In the first part of this thesis, we focus on incorporating stochastic volatility in mortality modeling, introducing the notion of longevity Greeks, and analysing the properties of longevity Greeks and their applications in index-based longevity hedging. In more detail, we derive three important longevity Greeks--delta, gamma and vega--on the basis of an extended version of the Lee-Carter model that incorporates stochastic volatility. We also study the properties of each longevity Greek, and estimate the levels of effectiveness that different longevity Greek hedges can possibly achieve. The results reveal several interesting facts. For example, we found and explained that, other things being equal, the magnitude of the longevity gamma of a q-forward increases with its reference age. As with what have been developed for equity options, these properties allow us to know more about standardized longevity derivatives as a risk mitigation tool. We also found that, in a delta-vega hedge formed by q-forwards, the choice of reference ages does not materially affect hedge effectiveness, but the choice of times-to-maturity does. These facts may aid insurers to better formulate their hedge portfolios, and issuers of mortality-linked securities to determine what security structures are more likely to attract liquidity. We then move onto delta hedging the trend and cohort components of longevity risk under the M7-M5 model. In a recent project commissioned by the Institute and Faculty of Actuaries and the Life and Longevity Markets Association, a two-population mortality model called the M7-M5 model is developed and recommended as an industry standard for the assessment of population basis risk. We develop a longevity delta hedging strategy for use with the M7-M5 model, taking into account of not only period effect uncertainty but also cohort effect uncertainty and population basis risk. To enhance practicality, the hedging strategy is formulated in both static and dynamic settings, and its effectiveness can be evaluated in terms of either variance or 1-year ahead Value-at-Risk (the latter is highly relevant to solvency capital requirements). Three real data illustrations are constructed to demonstrate (1) the impact of population basis risk and cohort effect uncertainty on hedge effectiveness, (3) the benefit of dynamically adjusting a delta longevity hedge, and (3) the relationship between risk premium and hedge effectiveness. The last part of this thesis sets out to obtain a deeper understanding of mortality volatility and its implications on index-based longevity hedging. The volatility of mortality is crucially important to many aspects of index-based longevity hedging, including instrument pricing, hedge calibration, and hedge performance evaluation. We first study the potential asymmetry in mortality volatility by considering a wide range of GARCH-type models that permit the volatility of mortality improvement to respond differently to positive and negative mortality shocks. We then investigate how the asymmetry of mortality volatility may impact index-based longevity hedging solutions by developing an extended longevity Greeks framework, which encompasses longevity Greeks for a wider range of GARCH-type models, an improved version of longevity vega, and a new longevity Greek known as `dynamic delta'. Our theoretical work is complemented by two real-data illustrations, the results of which suggest that the effectiveness of an index-based longevity hedge could be significantly impaired if the asymmetry in mortality volatility is not taken into account when the hedge is calibrated.
Book Synopsis Managing Longevity Risk - The Case for Longevity-Indexed Variable Expiration (LIVE) Bonds by : Arun Muralidhar
Download or read book Managing Longevity Risk - The Case for Longevity-Indexed Variable Expiration (LIVE) Bonds written by Arun Muralidhar and published by . This book was released on 2018 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: There is an annuity puzzle in that despite the welfare gains to individuals and society from consumers purchasing annuities, the actual allocation to these instruments by individuals is very low. Many explanations have been provided including adverse selection, complexity and inflexibility of the annuity contract, bequest motive etc. Insurance companies have tried to address these issues by changing their products, but take up has still been low. Some have argued that governments should create and issue longevity bonds that attempt to hedge overall economy-wide mortality risk to improve insurance companies' ability to hedge their annuity offering, thereby lowering costs. But these longevity bonds have some challenges and while an “improving social-welfare” case can be made for why governments should issue such bonds, these proponents have not shown how governments have a natural hedge. Instead, we suggest governments should create Longevity-Indexed Variable Expiration (LIVE) bonds. These bonds, targeted to individuals (and institutions) would pay income-only, and start paying only after the average life-expectancy of the economy (having addressed retirement income through life expectancy with a complementary BFFS/SeLFIES bond). Each bond will be cohort specific and based on tax collections of that cohort. In this fashion, the government is fully hedged (because the bond will be a form of a collateralized debt obligation), and hence a natural issuer, with low credit risk. Since BFFS/SeLFIES cover the life-expectancy of those living less than the average, only those individuals who live beyond the average (usually richer portions of the population) and with limited resources need purchase LIVE bonds. The paper also briefly discusses the portfolio strategies of those living beyond average life expectancy (which raises one challenge with this bond) and also how governments can ensure that they have sufficient funds to bear this risk. It concludes with the challenges to this approach as there are only three levers in addressing this issue through a bond (coupon payments, bonds outstanding and maturity) and allowing maturity to be flexible requires the first two to decline over time and hence in LIVE we focus on just the coupon declining.
Book Synopsis Modelling Longevity Dynamics for Pensions and Annuity Business by : Ermanno Pitacco
Download or read book Modelling Longevity Dynamics for Pensions and Annuity Business written by Ermanno Pitacco and published by OUP Oxford. This book was released on 2009-01-29 with total page 417 pages. Available in PDF, EPUB and Kindle. Book excerpt: Mortality improvements, uncertainty in future mortality trends and the relevant impact on life annuities and pension plans constitute important topics in the field of actuarial mathematics and life insurance techniques. In particular, actuarial calculations concerning pensions, life annuities and other living benefits (provided, for example, by long-term care insurance products and whole life sickness covers) are based on survival probabilities which necessarily extend over a long time horizon. In order to avoid underestimation of the related liabilities, the insurance company (or the pension plan) must adopt an appropriate forecast of future mortality. Great attention is currently being devoted to the management of life annuity portfolios, both from a theoretical and a practical point of view, because of the growing importance of annuity benefits paid by private pension schemes. In particular, the progressive shift from defined benefit to defined contribution pension schemes has increased the interest in life annuities with a guaranteed annual amount. This book provides a comprehensive and detailed description of methods for projecting mortality, and an extensive introduction to some important issues concerning longevity risk in the area of life annuities and pension benefits. It relies on research work carried out by the authors, as well as on a wide teaching experience and in CPD (Continuing Professional Development) initiatives. The following topics are dealt with: life annuities in the framework of post-retirement income strategies; the basic mortality model; recent mortality trends that have been experienced; general features of projection models; discussion of stochastic projection models, with numerical illustrations; measuring and managing longevity risk.
Download or read book Pension Economics written by David Blake and published by John Wiley & Sons. This book was released on 2006-11-02 with total page 270 pages. Available in PDF, EPUB and Kindle. Book excerpt: While not attempting to train readers as professional economists, this book aims to provide a secure grounding in the theory and practice of economics insofar as it deals with pension matters. From reading this book, the user will understand: * The key types of pension scheme * The role of pensions in maximizing individual lifetime welfare * The role of pensions in individual savings and retirement decisions * The role and consequences of the pension plan from the company's viewpoint * The role of pensions in promoting aggregate savings * The role of pensions and retirement in overlapping generations models * The economics of ageing and intergenerational accounting * The social welfare implications of pensions * The lessons of behavioural economics for pensions
Book Synopsis Modelling Longevity Dynamics for Pensions and Annuity Business by : Ermanno Pitacco
Download or read book Modelling Longevity Dynamics for Pensions and Annuity Business written by Ermanno Pitacco and published by OUP Oxford. This book was released on 2009-01-29 with total page 416 pages. Available in PDF, EPUB and Kindle. Book excerpt: Mortality improvements, uncertainty in future mortality trends and the relevant impact on life annuities and pension plans constitute important topics in the field of actuarial mathematics and life insurance techniques. In particular, actuarial calculations concerning pensions, life annuities and other living benefits (provided, for example, by long-term care insurance products and whole life sickness covers) are based on survival probabilities which necessarily extend over a long time horizon. In order to avoid underestimation of the related liabilities, the insurance company (or the pension plan) must adopt an appropriate forecast of future mortality. Great attention is currently being devoted to the management of life annuity portfolios, both from a theoretical and a practical point of view, because of the growing importance of annuity benefits paid by private pension schemes. In particular, the progressive shift from defined benefit to defined contribution pension schemes has increased the interest in life annuities with a guaranteed annual amount. This book provides a comprehensive and detailed description of methods for projecting mortality, and an extensive introduction to some important issues concerning longevity risk in the area of life annuities and pension benefits. It relies on research work carried out by the authors, as well as on a wide teaching experience and in CPD (Continuing Professional Development) initiatives. The following topics are dealt with: life annuities in the framework of post-retirement income strategies; the basic mortality model; recent mortality trends that have been experienced; general features of projection models; discussion of stochastic projection models, with numerical illustrations; measuring and managing longevity risk.
Book Synopsis Life Annuity Products and Their Guarantees by : Collectif
Download or read book Life Annuity Products and Their Guarantees written by Collectif and published by OECD. This book was released on 2016-12-05 with total page 108 pages. Available in PDF, EPUB and Kindle. Book excerpt: This publication helps policy makers to better understand annuity products and the guarantees they provide in order to optimise the role that these products can play in financing retirement. Product design is a crucial factor in the potential role of annuity products within the pension system, along with the cost and demand for these products, and the resulting risks that are borne by the annuity providers. Increasingly complex products, however, pose additional challenges concerning consumer protection. Consumers need to be aware of their options and have access to unbiased and comprehensible advice and information about these products.
