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Assessing Investment and Longevity Risks within Immediate Annuities

Listed author(s):
  • Bauer Daniel

    (Georgia State University)

  • Weber Frederik

    (Ludwig-Maximilians-Universität München, Germany)

Registered author(s):

    Life annuities provide a guaranteed income for the remainder of the recipients lifetime, and therefore, annuitization represents an important option when choosing an adequate investment strategy for the retirement period. While there are numerous scientific articles studying annuities from the pensioners point of view, thus far, there have been few contributions considering annuities from the providers perspective. In particular, there are no surveys on the general risks within annuity books.The present paper aims at filling this gap: Using a simulation framework, it provides a longterm analysis of the risks within annuity books. More specifically, the mutual as well as the respective impacts of systematic mortality risk and investment risk on the insurers 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 longevity risk seems to be very high relative to its characteristics. Possible explanations as well as economic implications are provided, and potential caveats are discussed.

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    File URL: https://www.degruyter.com/view/j/apjri.2008.3.1/apjri.2008.3.1.1031/apjri.2008.3.1.1031.xml?format=INT
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    Article provided by De Gruyter in its journal Asia-Pacific Journal of Risk and Insurance.

    Volume (Year): 3 (2008)
    Issue (Month): 1 (September)
    Pages: 1-24

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    Handle: RePEc:bpj:apjrin:v:3:y:2008:i:1:n:6
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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.
    2. Moshe A. Milevsky & Kristen S. Moore & Virginia R. Young, 2006. "Asset Allocation And Annuity-Purchase Strategies To Minimize The Probability Of Financial Ruin," Mathematical Finance, Wiley Blackwell, vol. 16(4), pages 647-671.
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