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Optimal longevity risk transfer under asymmetric information

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  • Chen, An
  • Li, Hong
  • Schultze, Mark B.

Abstract

Due to the increasing life expectancy, pension funds, life annuity providers, and reinsurance companies find their longevity risk substantially growing. Correspondingly, various longevity risk-transferring solutions have been developed. Information asymmetry, i.e., general capital market investors have less knowledge of longevity risk than the risk exposure holders and are worried they will be sold a ‘lemon’, has been a key obstacle to developing a longevity-linked capital market. Using a principal–agent model, we study the optimal transfer of longevity risk between capital market investors and longevity risk exposure holders under information asymmetry. With indemnity longevity swaps as an example, analytical solutions to the optimal incentive-compatible contracts are derived in both a monopolistic and a competitive market setting. We find that information asymmetry could lead to market collapse. However, when the market exists, properly addressing information asymmetry could substantially benefit the market participants.

Suggested Citation

  • Chen, An & Li, Hong & Schultze, Mark B., 2023. "Optimal longevity risk transfer under asymmetric information," Economic Modelling, Elsevier, vol. 120(C).
    • Handle: RePEc:eee:ecmode:v:120:y:2023:i:c:s0264999322004163
    DOI: 10.1016/j.econmod.2022.106179
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    Cited by:

    1. Chen, Ze & Feng, Runhuan & Li, Hong & Yang, Tianyu, 2024. "Coping with longevity via hedging: Fair dynamic valuation of variable annuities," Insurance: Mathematics and Economics, Elsevier, vol. 117(C), pages 154-169.
    2. David Landriault & Bin Li & Hong Li & Yuanyuan Zhang, 2024. "Contract Structure and Risk Aversion in Longevity Risk Transfers," Papers 2409.08914, arXiv.org.
    3. Matthias Börger & Arne Freimann & Jochen Ruß, 2023. "On the economics of the longevity risk transfer market," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 90(3), pages 597-632, September.

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    More about this item

    Keywords

    Longevity risk; Adverse selection; Longevity swap; Economic pricing; Principal–agent-model;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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