An Optimal Product Mix for Hedging Longevity Risk in Life Insurance Companies: The Immunization Theory Approach

Wang, Jennifer L.; Huang, Hong; Yang, Sharon S.; Tsai, Jong-Rung

doi:10.1111/j.1539-6975.2009.01325.x

Cited by 94 publications

(57 citation statements)

References 39 publications

Supporting

Mentioning

Contrasting

Unclassified

Order By: Relevance

“…Consider for example an insurance company that holds a portfolio of life annuities and a portfolio of death benefit insurance policies. Because the present value of the liabilities of life annuities increases when death rates decrease, and the opposite holds for the present value of the liabilities of death benefit insurance, the two types of liabilities are typically negatively correlated (see, e.g., Cox and Lin, 2007;Wang et al, 2010;. The above example suggests that using the CTE rule to allocate risk capital in this case could result in negative risk capital allocated to one of the two portfolios.…”

Section: Example 23 Consider the Risk Capital Allocation Problem R mentioning

confidence: 99%

Excess based allocation of risk capital

Gulick¹,

Waegenaere

Norde

2012

Insurance: Mathematics and Economics

View full text Add to dashboard Cite

In this paper we propose a new rule to allocate risk capital to portfolios or divisions within a firm. Specifically, we determine the capital allocation that minimizes the excesses of sets of portfolios in lexicographical sense. The excess of a set of portfolios is defined as the expected loss of that set of portfolios in excess of the amount of risk capital allocated to them. The underlying idea is that large excesses are undesirable, and therefore the goal is to determine the allocation for which the largest excess is as small as possible. We show that this allocation rule yields a unique allocation, and that it satisfies some desirable properties. We also show that the allocation can be determined by solving a series of linear programming problems.

show abstract

Section: Example 23 Consider the Risk Capital Allocation Problem R mentioning

confidence: 99%

Excess based allocation of risk capital

Gulick¹,

Waegenaere

Norde

2012

Insurance: Mathematics and Economics

View full text Add to dashboard Cite

show abstract

“…(27). The parameters κ t , for t ∈ T , γ c , for c ∈ C, and C (g) are estimated by maximizing the corresponding log likelihood, where we use for T the sample period from 1977 until 2006 and for the set X of ages the ages 60 until 100+.…”

Section: B3 Cbd Modelsmentioning

confidence: 99%

“…To forecast the future mortality probabilities, we use (27), combined with (28), (31), or (32) (depending on the model), together with (29)-(30) and (33). Let q (g)…”

Section: A the Distribution Of The Financial Returnsmentioning

confidence: 99%

Longevity Risk and Natural Hedge Potential in Portfolios of Life Insurance Products: The Effect of Investment Risk

Stevens

Waegenaere²,

Melenberg

2011

SSRN Journal

View full text Add to dashboard Cite

Payments of life insurance products depend on the uncertain future evolution of survival probabilities. This uncertainty is referred to as longevity risk. Existing literature shows that the effect of longevity risk on single life annuities can be substantial, and that there exists a (natural) hedge potential from combining single life annuities with death benefits or from investing in survivor swaps. The effect of financial risk on these hedge effects is typically ignored. The aim of this paper is to quantify longevity risk in portfolios of mortality-linked assets and liabilities, taking into account the effect of financial risk. We find that investment risk significantly affects the impact of longevity risk in life insurance products. It also significantly affects the hedge potential that arises from combining life insurance products, or from investing in longevity-linked assets. For example, our results suggest that ignoring the effect of financial risk can lead to severe overestimation of the natural hedge potential from death benefits, and underestimation of the hedge effects of survivor swaps.

show abstract

“…This may be because of adverse selection problems and the diffi culties of managing their residual longevity risk due to the lack of suitable fi nancial products for managing this risk. Wang et al 17 demonstrate an immunization model for determining the optimal life insurance-annuity product mix for hedging longevity risk based on the Lee -Carter mortality forecasting model. 18 However, in a situation where annuity providers are not in the business of life insurance, (or vice versa) in-house hedging of longevity risk would be infeasible.…”

Section: Managing Longevity Riskmentioning

confidence: 99%

Design considerations for retirement savings and retirement income products

Alles

2011

Pensions Int J

View full text Add to dashboard Cite

. He received his MBA and PhD degrees in Finance from Washington State University. He has over 40 publications to his credit in numerous academic and industry journals on topics covering asset pricing theory and applications, portfolio management and investment strategies, asset securitization and structured fi nancing, futures and options markets and developmental issues in fi nancial markets. He has held visiting appointments from time to time at the IMF and at Universities in Canada, United States, Ireland and Sri Lanka, and has served as a consultant to the Asian Development Bank and several Australian government agencies.ABSTRACT In the backdrop of a world with an ageing population and increasing life expectancy, the impact of the global fi nancial crisis on the values of pension and superannuation funds has underscored the vulnerability of the wealth pool of retirees and their well-being during retirement. In light of this, it is important to examine how the design and delivery of retirement savings and income products can address these vulnerabilities. The purpose of this article is to review and evaluate the factors that need to be considered and the features that need to be incorporated in designing and developing retirement savings and retirement income products to address the concerns of investors, both in the accumulation and draw down phases of retirement investment management.

show abstract

An Optimal Product Mix for Hedging Longevity Risk in Life Insurance Companies: The Immunization Theory Approach

Cited by 94 publications

References 39 publications

Excess based allocation of risk capital

Excess based allocation of risk capital

Longevity Risk and Natural Hedge Potential in Portfolios of Life Insurance Products: The Effect of Investment Risk

Design considerations for retirement savings and retirement income products

Contact Info

Product

Resources

About