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Liability-driven investment in longevity risk management

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  • Helena Aro
  • Teemu Pennanen

Abstract

This paper studies optimal investment from the point of view of an investor with longevity-linked liabilities. The relevant optimization problems rarely are analytically tractable, but we are able to show numerically that liability driven investment can significantly outperform common strategies that do not take the liabilities into account. In problems without liabilities the advantage disappears, which suggests that the superiority of the proposed strategies is indeed based on connections between liabilities and asset returns.

Suggested Citation

  • Helena Aro & Teemu Pennanen, 2013. "Liability-driven investment in longevity risk management," Papers 1307.8261, arXiv.org.
  • Handle: RePEc:arx:papers:1307.8261
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    File URL: http://arxiv.org/pdf/1307.8261
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    References listed on IDEAS

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    1. Bauer, Daniel & Börger, Matthias & Ruß, Jochen, 2010. "On the pricing of longevity-linked securities," Insurance: Mathematics and Economics, Elsevier, vol. 46(1), pages 139-149, February.
    2. David Blake & Andrew Cairns & Kevin Dowd & Richard MacMinn, 2006. "Longevity Bonds: Financial Engineering, Valuation, and Hedging," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(4), pages 647-672.
    3. Cairns, Andrew J.G. & Blake, David & Dowd, Kevin, 2006. "Pricing Death: Frameworks for the Valuation and Securitization of Mortality Risk," ASTIN Bulletin: The Journal of the International Actuarial Association, Cambridge University Press, vol. 36(01), pages 79-120, May.
    4. Stéphane Loisel, 2010. "Understanding, Modeling and Managing Longevity Risk: Key Issues and Main Challenges," Post-Print hal-00517902, HAL.
    5. Ballotta, Laura & Haberman, Steven, 2006. "The fair valuation problem of guaranteed annuity options: The stochastic mortality environment case," Insurance: Mathematics and Economics, Elsevier, vol. 38(1), pages 195-214, February.
    6. Wilkie, A. D. & Waters, H. R. & Yang, S., 2003. "Reserving, Pricing and Hedging For Policies with Guaranteed Annuity Options," British Actuarial Journal, Cambridge University Press, vol. 9(02), pages 263-391, June.
    7. Kevin Dowd & David Blake & Andrew J. G. Cairns & Paul Dawson, 2006. "Survivor Swaps," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(1), pages 1-17.
    8. Yijia Lin & Samuel H. Cox, 2005. "Securitization of Mortality Risks in Life Annuities," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 72(2), pages 227-252.
    9. Black, Fischer & Perold, AndreF., 1992. "Theory of constant proportion portfolio insurance," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 403-426.
    10. Jennifer L. Wang & H.C. Huang & Sharon S. Yang & Jeffrey T. Tsai, 2010. "An Optimal Product Mix for Hedging Longevity Risk in Life Insurance Companies: The Immunization Theory Approach," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(2), pages 473-497.
    11. Blake, D. & Cairns, A. J. G. & Dowd, K., 2006. "Living with Mortality: Longevity Bonds and Other Mortality-Linked Securities," British Actuarial Journal, Cambridge University Press, vol. 12(01), pages 153-197, March.
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    Cited by:

    1. Youssouf A. F. Toukourou & Franc{c}ois Dufresne, 2015. "ON Integrated Chance Constraints in ALM for Pension Funds," Papers 1503.05343, arXiv.org.

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