Securitization, structuring and pricing of longevity risk

Wills, Samuel; Sherris, Michael

doi:10.1016/j.insmatheco.2009.09.014

Cited by 78 publications

(46 citation statements)

References 22 publications

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“…27 See for instance Wills and Sherris (2010), Hanewald et al (2013) and Gatzert and Wesker (2012). 28 On a formal investigation of the problem, see among others Finkelstein and Poterba (2004 …”

Section: Adverse Selectionmentioning

confidence: 99%

A Stochastic Forward-Looking Model to Assess the Profitability and Solvency of European Insurers

2016

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may No 2028 / February 2017 AbstractIn this paper, we develop an analytical framework for conducting forward-looking assessments of profitability and solvency of the main euro area insurance sectors. We model the balance sheet of an insurance company encompassing both life and non-life business and we calibrate it using country level data to make it representative of the major euro area insurance markets. Then, we project this representative balance sheet forward under stochastic capital markets, stochastic mortality developments and stochastic claims. The model highlights the potential threats to insurers solvency and profitability stemming from a sustained period of low interest rates particularly in those markets which are largely exposed to reinvestment risks due to the relatively high guarantees and generous profit participation schemes. The model also proves how the resilience of insurers to adverse financial developments heavily depends on the diversification of their business mix. Finally, the model identifies potential negative spillovers between life and nonlife business through the redistribution of capital within groups. Non-technical SummaryIn recent years, the level of interest rates has been declining to historical lows worldwide. This development has given rise to concerns for the stability of the financial system and in particular of insurers due to their exposure to downside risks in a low interest rate environment. Life insurance business representing the lion's share of the balance sheet for European insurance companies appears particularly vulnerable to low interest rates due to the extended use of financial guarantees which, in some markets, were massively sold to policyholders in the past and which are now becoming very expensive to fund. European life insurance business has been traditionally characterized by the presence of financial guarantees embedded in the savings products, i.e. a minimum rate of return that is granted to policyholders. In times of low interest rates, this business model might represent not only a threat for the profitability of the insurance companies but it might also endanger their solvency position. Insurance companies tend to allocate large portions of their investment portfolio to bonds in order to replicate their liability portfolio. Thus, as interest rates remain low and the reinvestment risk materializes, the expected return on investments declines, making it more...

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Section: Adverse Selectionmentioning

confidence: 99%

A Stochastic Forward-Looking Model to Assess the Profitability and Solvency of European Insurers

2016

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“…The model provides a good fit to historical data for the ages and time period considered, capturing the stochastic trends in mortality improvement at different ages, across time as well as the multivariate dependence structure across ages. Wills and Sherris (2008) [33] calibrate the model to insurance linked market prices and analyse the pricing and structuring of longevity bonds.…”

Section: Introductionmentioning

confidence: 99%

Integrating Financial and Demographic Longevity Risk Models: An Australian Model for Financial Applications

Wills

Sherris²

2011

SSRN Journal

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“…Examples from the former include Bauer and Russ (2006), Bauer and Kramer (2008), , Blake, Cairns, Dowd, and MacMinn (2006), Cairns, Blake, and Dowd (2008), Dahl and Møller (2005), Sherris and Wills (2007), and Wills and Sherris (2008). In the practitioner community, JPMorgan (2007) has set up LifeMetrics, one of whose stated purposes is to "Build a liquid market for longevity derivatives."…”

Section: Introductionmentioning

confidence: 99%

Options on normal underlyings with an application to the pricing of survivor swaptions

Dawson

Dowd

Cairns

et al. 2009

Journal of Futures Markets

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Survivor derivatives are gaining considerable attention in both the academic and practitioner communities. Early trading in such products has generally been confined to products with linear payoffs, both funded (bonds) and unfunded (swaps). History suggests that successful linear payoff derivatives are frequently followed by the development of option-based products. The random variable in the survivor swap pricing methodology developed by Dowd et al [2006] is (approximately) normally, rather than lognormally, distributed and thus a survivor swaption calls for an option pricing model in which the former distribution is incorporated. We derive such a model here, together with the Greeks and present a discussion of its application to the pricing of survivor swaptions.

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Securitization, structuring and pricing of longevity risk

Cited by 78 publications

References 22 publications

A Stochastic Forward-Looking Model to Assess the Profitability and Solvency of European Insurers

A Stochastic Forward-Looking Model to Assess the Profitability and Solvency of European Insurers

Integrating Financial and Demographic Longevity Risk Models: An Australian Model for Financial Applications

Options on normal underlyings with an application to the pricing of survivor swaptions

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