Longevity Risk

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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In addition to adding Australia to the modeling, this was the first bond to link together the RMS longevity risk model with RMS excess mortality risk models, to provide a holistic view of the risk using science- based modeling.
DB pensions are more cost efficient than DC accounts because of higher investment returns and longevity risk pooling.
So if I were a senior and I knew that there was a chance that either I or my spouse could live for another 30 years, and that means there has to be enough money to pay living expenses, increased medical costs, increased long-term care and exposure to inflation over 30 years, then I must to find a way to handle both that longevity risk and the investment risk and life insurance happens to be the ideal product to do that because at the moment of death there is a whole bunch of income and often estate tax-free dollars that helps to refill the bucket.
With life expectancies increasing substantially beyond what was expected when DB schemes were first implemented, a market in longevity risk is beginning to develop with the first few large deals having taken place over the last 12 months.
Global Banking News-22 February 2010-BMW offloads longevity risk to Deutsche Bank(C)2010 ENPublishing - http://www.
So, it is going to be a big challenge for life insurance companies to price the longevity risk.
The insurance of pensioners involves transferring assets to the insurer, which leaves a depleted asset portfolio to cover the longer-term liabilities that have higher interest, inflation and longevity risk.
Tsai, 2010, An Optimal Product Mix for Hedging Longevity Risk in Life Insurance Companies: The Immunization Theory Approach, Journal of Risk and Insurance, 77(2): 473-497.
The investment occurred shortly after the London Business School released a detailed report on life settlements stating, in part, "Given that longevity risk is largely uncorrelated with other financial markets, the life settlement option appears to be not only greatly beneficial for policyowners wanting to sell their policies, but also provides an interesting investment opportunity for institutional investors willing to include longevity risk in their portfolio and to commit capital for the medium term.
Demonstrated by the consistent growth of our membership, ILMA is a key leader across the spectrum of products designed for investors in longevity risk and our new name captures our broader focus.
This agreement is an innovative way to de-risk pension obligations by taking proactive measures to guard against longevity risk without the requirement for additional cash contributions.