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Assessing Investment and Longevity Risks within Immediate Annuities

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  • Bauer, Daniel
  • Weber, Frederik

Abstract

Life annuities provide a guaranteed income for the remainder of the recipient’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 pensioner’s point of view, thus far there have been few contributions considering annuities from the provider’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 insurer’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.

Suggested Citation

  • Bauer, Daniel & Weber, Frederik, 2007. "Assessing Investment and Longevity Risks within Immediate Annuities," Discussion Papers in Business Administration 1982, University of Munich, Munich School of Management.
  • Handle: RePEc:lmu:msmdpa:1982
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    File URL: https://epub.ub.uni-muenchen.de/1982/1/wp2007-07.pdf
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    References listed on IDEAS

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    1. Dowd, Kevin & Cairns, Andrew J.G. & Blake, David, 2006. "Mortality-dependent financial risk measures," Insurance: Mathematics and Economics, Elsevier, vol. 38(3), pages 427-440, June.
    2. Olivia S. Mitchell, 1999. "New Evidence on the Money's Worth of Individual Annuities," American Economic Review, American Economic Association, vol. 89(5), pages 1299-1318, December.
    3. Willets, R. C., 2004. "The Cohort Effect: Insights and Explanations," British Actuarial Journal, Cambridge University Press, vol. 10(04), pages 833-877, October.
    4. repec:nsr:niesrd:282 is not listed on IDEAS
    5. Andrew J. G. Cairns & David Blake & Kevin Dowd, 2006. "A Two-Factor Model for Stochastic Mortality with Parameter Uncertainty: Theory and Calibration," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(4), pages 687-718.
    6. Milevsky, Moshe A. & Young, Virginia R., 2007. "The timing of annuitization: Investment dominance and mortality risk," Insurance: Mathematics and Economics, Elsevier, vol. 40(1), pages 135-144, January.
    7. 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.
    8. 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.
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    Cited by:

    1. Bauer Daniel & Börger Matthias & Ruß Jochen & Zwiesler Hans-Joachim, 2008. "The Volatility of Mortality," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 3(1), pages 1-29, September.
    2. Yang, Sharon S. & Yue, Jack C. & Huang, Hong-Chih, 2010. "Modeling longevity risks using a principal component approach: A comparison with existing stochastic mortality models," Insurance: Mathematics and Economics, Elsevier, vol. 46(1), pages 254-270, February.

    More about this item

    Keywords

    Annuities; Lee-Carter Model; Longevity Risk;

    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

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