On the effectiveness of natural hedging for insurance companies and pension plans

Jackie Li and Steven Haberman

Insurance: Mathematics and Economics, 2015, vol. 61, issue C, 286-297

Abstract: 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.

Keywords: Longevity risk; Natural hedging; Poisson Lee–Carter model; Poisson common factor model; Product-ratio model; Historical simulation; Value-at-Risk; Risk reduction (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:61:y:2015:i:c:p:286-297

DOI: 10.1016/j.insmatheco.2015.01.009

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