Longevity-Indexed Life Annuities

Abstract

This is the accepted version of the paper.This version of the publication may differ from the final published version. Permanent LONGEVITY-INDEXED LIFE ANNUITIESAbstract.This paper addresses the problem of the sharing of longevity risk between an annuity provider and a group of annuitants. An appropriate longevity index is designed in order to adapt the amount of the periodic payments in life annuity contracts. This accounts for unexpected longevity improvements experienced by a given reference population. The approach described in the present paper is in contrast with Group Self-Annuitization where annuitants bear their own risk. Here, the annuitants only bear the non-diversifiable risk that the future mortality trend departs from that of the reference forecast. In that respect, the life annuities discussed in this paper are substitutes for reinsurance and securitization of longevity risk.

Accounting-Based Asset Return Smoothing in Participating Life Annuities: Implications for Annuitants, Insurers, and Policymakers

“…Only a limited number of studies has examined unit-linked annuities which allow the insurer to share investment and longevity risk with the policyholder (see, e.g., Piggott et al 2005;Denuit et al 2011;Richter and Weber 2011;Maurer et al 2013a). Based on those studies and our findings here, we believe that participating annuities offer retirees a favorable combination of access to the mortality credit and a smoothed payout stream for life.…”

Longevity-contingent deferred life annuities

“…In this paper, we have examined indexed life annuities, where the length of the deferment period is subject to re-evaluation, as opposed to periodic payments scaled by the ratio of the proportion of the population still alive compared to some reference forecast as in Denuit, Haberman and Renshaw (2011). Considering a deferred life annuity bought at age 0 x with payments starting at age 0 x +d, we let d vary according to actual longevity improvements: if longevity increases in the future, then payments start at age 0 x +d +Δ instead of 0 x +d.…”

“…Considering the substantial systematic longevity risk threatening annuity providers' solvency, indexing benefits on actual mortality improvements appears to be an efficient risk management tool, as discussed in Denuit, Renshaw (2011) andRichter andWeber (2011). Whereas these papers consider indexing annuity payments, the present work suggests that the length of the deferment period could also be subject to revision, providing longevity-contingent deferred life annuities.…”

“…As advocated by Denuit, Haberman and Renshaw (2011) and Richter and Weber (2011), re-designing annuity products to mitigate the systematic longevity risk threatening the provider's solvency offers promising perspectives. Part of this systematic risk is then left with the annuitants by letting annuity payments depend on actual mortality improvements experienced by a reference group (the general population of the country, for instance).…”

“…Indexing the deferment period keeping periodic payments constant once they start or adjusting the amounts of periodic payments as proposed by Denuit, Haberman and Renshaw (2011) are just two ways to share the systematic longevity risk with annuitants. From the annuity provider's point of view, regular adjustments of the periodic payments better protect against unexpected longevity trends while the annuity is being paid.…”