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Assessing Investment and Longevity Risks within Immediate Annuities

Author

Listed:
  • Bauer Daniel

    (Georgia State University)

  • Weber Frederik

    (Ludwig-Maximilians-Universität München, Germany)

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

Suggested Citation

  • Bauer Daniel & Weber Frederik, 2008. "Assessing Investment and Longevity Risks within Immediate Annuities," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 3(1), pages 1-24, September.
    • Handle: RePEc:bpj:apjrin:v:3:y:2008:i:1:n:6
    DOI: 10.2202/2153-3792.1031
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    References listed on IDEAS

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    3. Qi Ming, 2013. "The Impact of Mortality Risk on the Asset and Liability Management of Insurance Companies," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 7(2), pages 81-104, July.
    4. Post, Thomas, 2009. "Individual welfare gains from deferred life-annuities under stochastic Lee-Carter mortality," SFB 649 Discussion Papers 2009-022, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    5. 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.
    6. Katja Hanewald & Thomas Post & Helmut Gründl, 2011. "Stochastic Mortality, Macroeconomic Risks and Life Insurer Solvency," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 36(3), pages 458-475, July.
    7. Ngai, Andrew & Sherris, Michael, 2011. "Longevity risk management for life and variable annuities: The effectiveness of static hedging using longevity bonds and derivatives," Insurance: Mathematics and Economics, Elsevier, vol. 49(1), pages 100-114, July.
    8. Fang, H., 2016. "Insurance Markets for the Elderly," Handbook of the Economics of Population Aging, in: Piggott, John & Woodland, Alan (ed.), Handbook of the Economics of Population Aging, edition 1, volume 1, chapter 0, pages 237-309, Elsevier.
    9. Post Thomas, 2012. "Individual Welfare Gains from Deferred Life-Annuities under Stochastic Mortality," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 6(2), pages 1-26, June.
    10. Rabitti, Giovanni & Borgonovo, Emanuele, 2020. "Is mortality or interest rate the most important risk in annuity models? A comparison of sensitivity analysis methods," Insurance: Mathematics and Economics, Elsevier, vol. 95(C), pages 48-58.
    11. Chen, An & Rach, Manuel, 2019. "Options on tontines: An innovative way of combining tontines and annuities," Insurance: Mathematics and Economics, Elsevier, vol. 89(C), pages 182-192.
    12. Andy Wong & Michael Sherris & Ralph Stevens, 2017. "Natural Hedging Strategies for Life Insurers: Impact of Product Design and Risk Measure," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 84(1), pages 153-175, March.

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