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Longevity Risk and Natural Hedge Potential in Portfolios Of Life Insurance Products : The Effect of Investment Risk

Author

Listed:
  • Stevens, R.S.P.

    (Tilburg University, Center For Economic Research)

  • De Waegenaere, A.M.B.

    (Tilburg University, Center For Economic Research)

  • Melenberg, B.

    (Tilburg University, Center For Economic Research)

Abstract

Payments of life insurance products depend on the uncertain future evolution of survival probabilities. This uncertainty is referred to as longevity risk. Existing literature shows that the effect of longevity risk on single life annuities can be substantial, and that there exists a (natural) hedge potential from combining single life annuities with death benefits or from investing in survivor swaps. The effect of financial risk on these hedge effects is typically ignored. The aim of this paper is to quantify longevity risk in portfolios of mortality-linked assets and liabilities, taking into account the effect of financial risk. We find that investment risk significantly affects the impact of longevity risk in life insurance products. It also significantly affects the hedge potential that arises from combining life insurance products, or from investing in longevity-linked assets. For example, our results suggest that ignoring the effect of financial risk can lead to severe overestimation of the natural hedge potential from death benefits, and underestimation of the hedge effects of survivor swaps.

Suggested Citation

  • Stevens, R.S.P. & De Waegenaere, A.M.B. & Melenberg, B., 2011. "Longevity Risk and Natural Hedge Potential in Portfolios Of Life Insurance Products : The Effect of Investment Risk," Discussion Paper 2011-036, Tilburg University, Center for Economic Research.
  • Handle: RePEc:tiu:tiucen:a3e07689-4b6b-4987-852c-38003a8777e5
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    File URL: https://pure.uvt.nl/portal/files/1325143/2011-036.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Petar Jevtic' & Luca Regis, 2014. "Assessing the solvency of insurance portfolios via a continuous time cohort model," Working Papers 7/2014, IMT Institute for Advanced Studies Lucca, revised Jul 2014.
    2. Jevtić, Petar & Regis, Luca, 2015. "Assessing the solvency of insurance portfolios via a continuous-time cohort model," Insurance: Mathematics and Economics, Elsevier, vol. 61(C), pages 36-47.

    More about this item

    Keywords

    Life insurance; life annuities; death benefits; survivor swaps; risk management; financial risk; longevity risk; insolvency risk; capital adequacy;

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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