Geographical Diversification and Longevity Risk Mitigation in Annuity Portfolios

Abstract

This paper provides a method to assess the risk relief deriving from a foreign expansion by a life insurance company. We build a parsimonious continuous-time model for longevity risk that captures the dependence across different ages in domestic versus foreign populations. We calibrate the model to portray the case of a UK annuity portfolio expanding internationally toward Italian policyholders. The longevity risk diversification benefits of an international expansion are sizable, in particular when interest rates are low. The benefits are judged based on traditional measures, such as the Risk Margin or volatility reduction, and on a novel measure, the Diversification Index.

A Square-Root Factor-Based Multi-Population Extension of the Mortality Laws

“…In this paper, we advance the previous work and focus on the case in which factors are non-Gaussian, which has not been previously undertaken in the actuarial literature. While several other works have used factor models to represent the evolution of mortality intensity of multiple ages simultaneously in continuous time (see [3,4], for instance), only a few, however, have considered non-Gaussian factors [5].…”