Abstracts

Longevity risk -- the risk of unexpected increases in the systematic life expectancy of a population -- poses a great challenge to pension plans and annuity providers. This risk cannot be diversified away over a large pool of annuitants as it is systematic. It is also difficult and expensive to reinsure this risk or hedge it in the financial markets. As a result, standard life annuities have become increasingly expensive.
We explore different annuity designs where the longevity risk is shared between the insurer and the annuitant by indexing the annuity income to shocks to systematic longevity. Recently, different designs have been proposed in the literature, such as the Group self-annuitization (GSA) by Richter and Weber (2011) and the design by Denuit, Haberman, and Renshaw (2011). We consider different design elements, such as: i) the definition of the reference population and the resulting basis risk, ii) the potential to smooth longevity shocks in the annuity income and iii) limiting longevity via caps and floors on the indexation.
An important contribution of our work is that we compare different designs on their pricing and risk implications. Longevity risk is modelled by the Lee-Carter model and pricing implications are analysing by considering different assumptions for the risk premium for longevity risk.