Longevity Risk

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Longevity Risk

The risk that an individual will outlive his/her retirement savings. For example, if one's retirement consists of personal savings and a fixed-term annuity, the possibility exists that the money will run out before one dies. The risk is especially large if one has health problems in one's old age. One may mitigate longevity risk in a number of ways. For example, one may purchase investment vehicles such as a lifetime annuity, which guarantees payments for the remainder of one's life, or longevity insurance, which provides a lump sum benefit if one lives to a certain age.
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The last section of the book covers derivative products, either available now or under consideration, that will reduce or potentially eliminate longevity risks within life settlement portfolios.
This article investigates the natural hedging strategy to deal with longevity risks for life insurance companies.
It is imperative that individuals in The Retirement Red Zone understand both investment and longevity risks, and become comfortable that the right amount of their retirement savings is allocated to manage these risks," Fishbein says.
The article also looks at valuation issues in an incomplete markets context and finishes with an examination of how LBs can be used as a risk management tool for hedging longevity risks.
Holders of mortality risk -- typically institutions such as insurance carriers and reinsurers -- are economically exposed to a decrease in lifespan, while holders of longevity risks -- pension funds, annuity writers, the social security trust fund or life settlement investors -- are exposed to an increase.
A related capital market innovation, the longevity bond, provides life offices and pension plans with an instrument to hedge the much-longer-term longevity risks that they face.
Offsetting factors are the decline in new business profit margins, increasing exposure to longevity risks and the increasing utilisation of soft capital.
Best's opinion, the company's risk profile is likely to deteriorate, given the lack of direct experience in UK annuity risks at a time when there is increased uncertainty surrounding the evaluation of longevity risks.
By shifting the retirement focus from asset accumulation to income replacement, individuals will become more familiar with the risks they will face in the "decumulation" phase of their life: inflation, market and longevity risks.
MetLife developed "The Road to Retirement Security" guidebook as a resource to explain some of the major hazards that prevent consumers from a secure retirement including inflation, market and longevity risks.
New reporting timetables, model validation requirements, the application of the matching adjustment (MA) or volatility adjustment (VA), and accounting for credit and longevity risks are among the leading risk and capital modelling issues preoccupying UK life insurers as the 2016 Solvency II deadline draws nearer, a new study has found.
Property/casualty insurers and reinsurers use ILS to transfer risks off their books to capital market investors, while life insurers use ILS to transfer mortality and longevity risks in much the same manner.