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An innovative design of flexible, bequest-enhanced life annuity with natural hedging

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  • Yuxin Zhou
  • Michael Sherris
  • Jonathan Ziveyi
  • Mengyi Xu

Abstract

There is a significant potential demand around the world for a flexible product to manage individual longevity risk. However, annuity markets remain thin, driven by factors including lack of pricing transparency, high product loadings, bequest motives, loss aversion, and the difficulty to hedge the risk. This paper proposes an individual retirement product to allow flexible management of longevity risk. The product combines a lifetime income with a flexible death benefit to meet individual bequest needs. It also benefits the issuers by lower mortality risk due to the natural hedging, and thus lower capital cost as a risk margin. We apply actuarial models that provide transparent pricing for interest rate and mortality risk, the construction of immunized bond portfolios, and the determination of a loading and solvency margin for systematic longevity risk. We also quantify the natural hedging benefits arising from the flexible inclusion of both survival benefits and death benefits.

Suggested Citation

  • Yuxin Zhou & Michael Sherris & Jonathan Ziveyi & Mengyi Xu, 2022. "An innovative design of flexible, bequest-enhanced life annuity with natural hedging," Scandinavian Actuarial Journal, Taylor & Francis Journals, vol. 2022(6), pages 488-509, July.
    • Handle: RePEc:taf:sactxx:v:2022:y:2022:i:6:p:488-509
    DOI: 10.1080/03461238.2021.1997795
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    Cited by:

    1. Benjamin Avanzi & Lewis de Felice, 2023. "Optimal Strategies for the Decumulation of Retirement Savings under Differing Appetites for Liquidity and Investment Risks," Papers 2312.14355, arXiv.org, revised Mar 2024.

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