Longevity Risk

Abstract

SummaryMost of the western world has seen a steady increase in the average lifetime of its inhabitants over the past century. Although the past trends suggest that further changes in mortality rates are to be expected, considerable uncertainty exists regarding the future development of mortality. This type of uncertainty is referred to as longevity risk. This paper reviews the current state of the literature concerning longevity risk. First, we discuss the modeling of future mortality, including the Lee and Carter (J Am Stat Assoc 87:659-671, 1992)-approach, as well as other approaches. Second, we discuss the importance of longevity risk for the solvency of portfolios of pension and life insurance products. Finally, we investigate possibilities for longevity risk management. In particular, we consider longevity risk management through securitization and/or pension and insurance (re)design.

Time to death and the forecasting of macro-level health care expenditures: Some further considerations

“…Forecasts using several different linear approximations of the non-linear TTD model all led to similar findings. Finally, because all methods used to forecast mortality in some way extrapolate trends in mortality rates (Pitacco et al, 2008;De Waegenaere et al, 2010), we do not expect our results to be sensitive to the method used to forecast mortality.…”

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

“…We assume that if an insured person belongs to group (individual) insureds, the same holds for the insured's partner. 13 Comparing Figures 5 and 6 shows that the hedge effectiveness of survival swaps with basis risk is significantly smaller than without basis risk, especially for portfolios with both single life and survivor annuities. 12 In our model, mortality probabilities of the general population and of the population of the insurer are perfectly correlated.…”

“…This ensures that all hedgeable investment risk is eliminated (i.e., L invest is deterministic), and investment risk arises only due to uncertain returns on the buffer portfolio, which cannot be fully hedged because of the longevity uncertainty in the stream of the payments L τ − E L τ . Compared to the benchmark liability-only approach, taking into account investment risk implies that (comparing (13) to (10)): (i) the expected liabilities are valued at market value, i.e., using a term structure of interest rates instead of a flat discount rate (i.e., BEL instead of…”

“…The effect is stronger for portfolios with both single life and survivor annuities because the dependency between males and females. 13 Typically, the mortality probabilities of spouses are similar, due to, for instance, the living conditions. The figure displays the required buffer percentage as a function of s, for a fund with only single life annuities (w = 0) (left panels) and for a fund with single life and survivor annuities with w = 0.5 (right panels).…”

Forecasting differences in life expectancy by education

“…In many countries it has led to political debates about the statutory retirement age, and about how to finance the growing healthcare expenditures with public funds. Some Western European countries have explicitly linked their retirement age to the increase in LE (Ageing Working Group 2012), and the prospect of a continuing rise is reflected in the higher premiums now charged by the life insurance and annuity industry (Pitacco et al 2009;De Waegenaere et al 2010). But what are ignored by such measures are the great differences in length of life by socio-economic status (SES) (Mackenbach et al 2008;Van Kippersluis et al 2010).…”