Assessing Investment and Longevity Risks within Immediate Annuities
AbstractLife annuities provide a guaranteed income for the remainder of the recipientâ€™s lifetime, and therefore, annuitization presents an important option when choosing an adequate investment strategy for the retirement ages. While there are numerous research articles studying annuities from a pensionerâ€™s point of view, thus far there have been few contributions considering annuities from the providerâ€™s perspective. In particular, to date there are no surveys of the general risks within annuity books. The present paper aims at filling this gap: Using a simulation framework, it provides a long-term analysis of the risks within annuity books. In particular, the joint impact of mortality risks and investment risks as well as their respective influences on the insurerâ€™s financial situation are studied. The key finding is that, under the model specifications and using annuity data from the United Kingdom, the risk premium charged for aggregate mortality risk seems to be very large relative to its characteristics. Possible reasons as well as economic implications are provided, and potential caveats are discussed.
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Bibliographic InfoPaper provided by University of Munich, Munich School of Management in its series Discussion Papers in Business Administration with number 1982.
Date of creation: 2007
Date of revision:
Annuities; Lee-Carter Model; Longevity Risk;
Find related papers by JEL classification:
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-08-08 (All new papers)
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