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Understanding, Modeling and Managing Longevity Risk: Key Issues and Main Challenges

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Author Info
Pauline Barrieu () (Department of Statistics - London School of Economics)
Harry Bensusan (CMAP - Centre de Mathématiques Appliquées - CNRS : UMR7641 - Polytechnique - X)
Nicole El Karoui () (CMAP - Centre de Mathématiques Appliquées - CNRS : UMR7641 - Polytechnique - X)
Caroline Hillairet () (CMAP - Centre de Mathématiques Appliquées - CNRS : UMR7641 - Polytechnique - X)
Stéphane Loisel () (SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429)
Claudia Ravanelli () (Swiss Financial Institute - École Polytechnique Fédérale de Lausanne)
Yahia Salhi () (SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429, CERDALM - SCOR Global Life)

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Abstract

In this article we investigate the latest developments on longevity risk modeling. We first introduce longevity risk and some key actuarial definitions as to allow for a better understanding of the related challenges in term of risk management from both a financial and insurance point of view. The article also provides a global view on the practical issues on longevity-linked insurance and pension funds products that arise mainly from the steady increase in life expectancy since 1960s. Those issues are leading the industry to adopt more effective regulations to better assess and efficiently manage the inherited risks. Simultaneously, the development on the longevity has enhanced the need of capital markets as to manage and transfer the risk throughout the so-called insurance-linked securities (ILS). Therefore, we also highlight future developments on longevity risk management from a financial point of view, bringing up practices from the banking industry in terms of modeling and pricing.

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Paper provided by HAL in its series Working Papers with number hal-00417800_v1.

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Date of creation: Sep 2009
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Handle: RePEc:hal:wpaper:hal-00417800_v1

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Related research
Keywords: Longevity Risk; securitization; risk transfer; incomplete market; life insurance; stochastic mortality; pensions; long term interest rate; regulation; population dynamics.;

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  1. Renshaw, A.E. & Haberman, S., 2006. "A cohort-based extension to the Lee-Carter model for mortality reduction factors," Insurance: Mathematics and Economics, Elsevier, vol. 38(3), pages 556-570, June. [Downloadable!] (restricted)
  2. Gourieroux, C. & Monfort, A., 2008. "Quadratic stochastic intensity and prospective mortality tables," Insurance: Mathematics and Economics, Elsevier, vol. 43(1), pages 174-184, August. [Downloadable!] (restricted)
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  3. Pitacco, Ermanno, 2004. "Survival models in a dynamic context: a survey," Insurance: Mathematics and Economics, Elsevier, vol. 35(2), pages 279-298, October. [Downloadable!] (restricted)
  4. Dahl, Mikkel, 2004. "Stochastic mortality in life insurance: market reserves and mortality-linked insurance contracts," Insurance: Mathematics and Economics, Elsevier, vol. 35(1), pages 113-136, August. [Downloadable!] (restricted)
  5. Pablo Antolín & Hans Blommestein, 2007. "Governments and the Market for Longevity-Indexed Bonds," OECD Working Papers on Insurance and Private Pensions 4, OECD, Directorate for Financial and Enterprise Affairs. [Downloadable!]
  6. Andrew J. G. Cairns & David Blake & Kevin Dowd, 2006. "A Two-Factor Model for Stochastic Mortality with Parameter Uncertainty: Theory and Calibration," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(4), pages 687-718. [Downloadable!] (restricted)
  7. Christian Gollier, 2008. "Discounting with fat-tailed economic growth," Journal of Risk and Uncertainty, Springer, vol. 37(2), pages 171-186, December. [Downloadable!] (restricted)
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  8. Lars Peter Hansen & José A. Scheinkman, 2009. "Long-Term Risk: An Operator Approach," Econometrica, Econometric Society, vol. 77(1), pages 177-234, 01. [Downloadable!] (restricted)
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  9. Renshaw, A. E. & Haberman, S., 2003. "On the forecasting of mortality reduction factors," Insurance: Mathematics and Economics, Elsevier, vol. 32(3), pages 379-401, July. [Downloadable!] (restricted)
  10. Milevsky, Moshe A. & David Promislow, S., 2001. "Mortality derivatives and the option to annuitise," Insurance: Mathematics and Economics, Elsevier, vol. 29(3), pages 299-318, December. [Downloadable!] (restricted)
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