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Mortality-Indexed Annuities

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Author Info
Richter, Andreas
Weber, Frederik
Abstract

Longevity risk has become a major challenge for governments, individuals, and annuity providers in most countries, and especially its aggregate form, i.e. the risk of unsystematic changes to general mortality patterns, bears a large potential for accumulative losses for insurers. As obvious risk management tools such as (re)insurance or hedging are less suited to manage an annuity provider’s exposure to aggregate longevity risk, the current paper proposes a new type of life annuities with benefits contingent on actual mortality experience, and it also details actuarial aspects of implementation. Similar adaptations to conventional product design exist in investment-linked annuities, and a role model for long-term contracts contingent on actual cost experience is found in German private health insurance so that the idea is not novel in general, but it is in the context of longevity risk. By not or re-transferring the systematic longevity risk insurers may avoid accumulative losses so that the primary focus in an extensive Monte-Carlo simulation is on the question of whether and to what extent such products are also advantageous for policyholders in contrast to a comparable conventional annuity product.

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Publisher Info
Paper provided by University of Munich, Munich School of Management in its series Discussion Papers in Business Administration with number 10994.

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Date of creation: Sep 2009
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Handle: RePEc:lmu:msmdpa:10994

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Related research
Keywords: Longevity risk; systematic risk; risk avoidance; mortality-indexed annuities;

Find related papers by JEL classification:
G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies
G23 - Financial Economics - - Financial Institutions and Services - - - Pension Funds; Other Private Financial Institutions
C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods

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  1. Renshaw, A. E. & Haberman, S., 2003. "Lee-Carter mortality forecasting with age-specific enhancement," Insurance: Mathematics and Economics, Elsevier, vol. 33(2), pages 255-272, October. [Downloadable!] (restricted)
  2. Bauer, Daniel & Kiesel, Rudiger & Kling, Alexander & Ru[ss], Jochen, 2006. "Risk-neutral valuation of participating life insurance contracts," Insurance: Mathematics and Economics, Elsevier, vol. 39(2), pages 171-183, October. [Downloadable!] (restricted)
  3. Ronald Lee & Shripad Tuljapurkar, 1998. "Stochastic Forecasts for Social Security," NBER Chapters, in: Frontiers in the Economics of Aging, pages 393-428 National Bureau of Economic Research, Inc. [Downloadable!]
  4. Zweifel, Peter & Crivelli, Luca, 1996. "Price Regulation of Drugs: Lessons from Germany," Journal of Regulatory Economics, Springer, vol. 10(3), pages 257-73, November.
  5. Brouhns, Natacha & Denuit, Michel & Vermunt, Jeroen K., 2002. "A Poisson log-bilinear regression approach to the construction of projected lifetables," Insurance: Mathematics and Economics, Elsevier, vol. 31(3), pages 373-393, December. [Downloadable!] (restricted)
  6. Feldstein, Martin S, 1973. "The Welfare Loss of Excess Health Insurance," Journal of Political Economy, University of Chicago Press, vol. 81(2), pages 251-80, Part I, M. [Downloadable!] (restricted)
  7. Alexander Kling & Andreas Richter & Jochen Ruß, 2007. "The Impact of Surplus Distribution on the Risk Exposure of With Profit Life Insurance Policies Including Interest Rate Guarantees," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 74(3), pages 571-589. [Downloadable!] (restricted)
  8. Thomas Davidoff & Jeffrey R. Brown & Peter A. Diamond, 2005. "Annuities and Individual Welfare," American Economic Review, American Economic Association, vol. 95(5), pages 1573-1590, December. [Downloadable!]
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This page was last updated on 2009-11-17.

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