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Demographic risk transfer: is it worth for annuity providers?

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  • Elisa Luciano
  • Luca Regis

Abstract

Longevity risk transfer is a popular choice for annuity providers such as pension funds. This paper formalizes the trade-off between the cost and the risk relief of such choice, when the annuity provider uses value- at-risk to assess risk. Using first-order approximations we show that, if the transfer is fairly priced and the aim of the fund is to maximize returns, the funds' alternatives can be represented in the plane expected return- VaR. We build a risk-return frontier, along which the optimal transfer choices of the fund are located and calibrated it to the 2010 UK annuity and bond market.

Suggested Citation

  • Elisa Luciano & Luca Regis, 2012. "Demographic risk transfer: is it worth for annuity providers?," ICER Working Papers 11-2012, ICER - International Centre for Economic Research.
    • Handle: RePEc:icr:wpicer:11-2012
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    File URL: http://www.biblioecon.unito.it/biblioservizi/RePEc/icr/wp2012/ICERwp11-12.pdf
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    References listed on IDEAS

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    1. Josa-Fombellida, Ricardo & Rincón-Zapatero, Juan Pablo, 2010. "Optimal asset allocation for aggregated defined benefit pension funds with stochastic interest rates," European Journal of Operational Research, Elsevier, vol. 201(1), pages 211-221, February.
    2. Elisa Luciano & Luca Regis & Elena Vigna, 2017. "Single- and Cross-Generation Natural Hedging of Longevity and Financial Risk," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 84(3), pages 961-986, September.
    3. Jevtić, Petar & Luciano, Elisa & Vigna, Elena, 2013. "Mortality surface by means of continuous time cohort models," Insurance: Mathematics and Economics, Elsevier, vol. 53(1), pages 122-133.
    4. Luciano, Elisa & Regis, Luca & Vigna, Elena, 2012. "Delta–Gamma hedging of mortality and interest rate risk," Insurance: Mathematics and Economics, Elsevier, vol. 50(3), pages 402-412.
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