TY - JOUR
T1 - On the effectiveness of natural hedging for insurance companies and pension plans
AU - Li, Jackie
AU - Haberman, Steven
PY - 2015/3/1
Y1 - 2015/3/1
N2 - 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.
AB - 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.
UR - http://www.scopus.com/inward/record.url?scp=84925074762&partnerID=8YFLogxK
U2 - 10.1016/j.insmatheco.2015.01.009
DO - 10.1016/j.insmatheco.2015.01.009
M3 - Article
AN - SCOPUS:84925074762
VL - 61
SP - 286
EP - 297
JO - Insurance: Mathematics and Economics
JF - Insurance: Mathematics and Economics
SN - 1873-5959
ER -