Geographical diversification and longevity risk mitigation in annuity portfolios

Clemente De Rosa, Elisa Luciano and Luca Regis ()

No 546, Carlo Alberto Notebooks from Collegio Carlo Alberto

Abstract: This paper provides a method for assessing the regulatory and systemic risk relief deriving from a foreign expansion by a life-insurance company. We build a parsimonious continuous-time model for longevity risk, that captures the dependence across different ages in domestic versus foreign populations. We provide two measures of the diversification effects of expanding an annuity portfolio toward a foreign population. The reduction in the risk margin, computed à la Solvency II, provides a measure of the benefit in the tail risk. The Diversification Index provides an assessment of the average diversification benefit of combining different populations in one portfolio. We calibrate the model to portray the case of a UK annuity portfolio expanding internationally towards Italian policyholders. Our application shows that the longevity risk diversification benefits of an international expansion are sizable, in particular when interest rates are low.

Keywords: geographical diversification; life insurance; risk management; multi-population mortality; longevity risk modeling; Solvency II capital requirements. (search for similar items in EconPapers)
JEL-codes: F23 F65 G15 G22 (search for similar items in EconPapers)
Pages: pages 25
Date: 2017, Revised 2019
References: View references in EconPapers View complete reference list from CitEc
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Related works:
Journal Article: GEOGRAPHICAL DIVERSIFICATION AND LONGEVITY RISK MITIGATION IN ANNUITY PORTFOLIOS (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:cca:wpaper:546

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