Li, J. & Haberman, S. (2015). On the effectiveness of natural hedging for insurance companies and pension plans. Insurance: Mathematics and Economics, 61, pp. 286-297. doi: 10.1016/j.insmatheco.2015.01.009
- Accepted Version
Restricted to Repository staff only until 31 January 2018.
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Natural hedging is one possible method to reduce longevity risk exposure for an annuity provider or a pension plan. In this paper, we provide an assessment of the effectiveness of natural hedging between annuity and life products, using the correlated Poisson Lee–Carter model, Poisson common factor model, product-ratio model, and historical simulation. Our analysis is based on the mortality experience of UK assured lives, pensioners, and annuitants, and the national population of England and Wales. We consider a range of different scenarios, and find that the level of risk reduction is significant in general, with an average of around 60%. These results have important implications for those insurers, reinsurers, and pension plan sponsors who are seeking ways to hedge their unwanted risk exposures.
|Additional Information:||NOTICE: this is the author’s version of a work that was accepted for publication in Insurance: Mathematics and Economics. Changes resulting from the publishing process, such as editing, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Insurance: Mathematics and Economics, 61, 31/01/2015, DOI 10.1016/j.insmatheco.2015.01.009|
|Subjects:||H Social Sciences > HB Economic Theory|
|Divisions:||Cass Business School > Faculty of Actuarial Science & Insurance|
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