Hedging Longevity Risk through Reinsurance
Gavin Jones and Steven Rimmer
Foreword
Introduction
Ageing Populations and Changing Demographics
Determinants of Changes in Life Expectancy
Magnitude of the Longevity Issue
Pricing Longevity Risk: Establishing the Base Mortality Level
An Introduction to Credibility Theory
Projecting Future Mortality
Modelling Longevity Risk under a One-Year VaR Framework
Risk Transfer for Pension Schemes
De-Risking Insured Annuity Portfolios
Hedging Longevity Risk through Reinsurance
Commercial Aspects of Longevity Reinsurance
Extreme Mortality Risk as a Natural Hedge?
Capital Markets and Longevity Risk Transfer
Longevity Indices
Longevity Policy Committee
Legal Considerations and Challenges in Longevity Risk Transactions
Pensions and Longevity in the US
Canadian Pensioner Longevity Risk
The Dutch Pensions and Longevity Insurance Market
Reinsurance provides a means for insurers to hedge their own longevity risk via the complete transfer of a specified liability. Globally, interest in the transfer of longevity risk increased at a time when reinsurance capacity and availability similarly increased, enabling insurers, most notably in the UK but also developing in markets such as the US, Canada and the Netherlands, to manage exposure. International markets are explored in further detail in Chapters 17–19.
For this reason, our discussion of the major types of reinsurance transactions available to transfer longevity risk has a special significance. Longevity risk transactions were taken up in Chapters 8 and 9 with the description of asset-backed transactions and longevity swaps. In this chapter we shall consider such reinsurance solutions in more detail and explore ways to mitigate counterparty credit exposure for these and provide specific examples of some of the largest transactions that have occurred. The capacity of the market is also explored further, with a focus on capital market solutions that may enable the insurance sector to manage its aggregate exposure and generate returns from its core function of
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