Longevity Risk Management and Static Hedging for Life and Variable Annuities Sixth International Longevity Risk and Capital Markets Solutions Conference.

Slides:

Advertisements

Similar presentations

Market risk management of public debt First Annual Meeting of Latin American and Caribbean Public Debt Management Specialists Ove Sten Jensen & Morten.

Advertisements

Asset Liability Management is a procedure which allows us to gain an understanding whether the companys assets would be sufficient to meet the companys.

2013 MICHAEL RICE CEO 13 December © 2013 Rice Warner They have the following characteristics:  Co ntributions cannot be made into these products.

Different Types of Annuities P. Antolín OECD, Private Pension Unit at DAF/FIN 1.

Status, Importance and Measures for Development of Annuity Products after Introduction of Voluntary Pension System Javed Ahmed President, Pakistan Society.

Practical Considerations in Managing Variable Annuities Stochastic Modeling Symposium Toronto By Thomas S.Y. Ho Sang Bin Lee Yoon Seok Choi April

Copyright ©2005 Ibbotson Associates, Inc. Variable Annuity Investing Securities offered through Lincoln Financial Advisors Corp., a broker/dealer, 1300.

Building a Simplified Stochastic Asset Liability Model (ALM) for a Malaysian Participating Annuity Fund 14th EAST ASIAN ACTUARIAL CONFERENCE Prepared by.

1 TREASURY INFLATION PROTECTED SECURITIES: INFLATION HEDGE OR DEFLATION OPTION Presented at EFA April 11-13, 2002 Ron D’Vari, Ph.D.,CFA Sr. Vice President,

Credit Risk in Derivative Pricing Frédéric Abergel Chair of Quantitative Finance École Centrale de Paris.

Interest Rate Options Chapter 18. Exchange-Traded Interest Rate Options Treasury bond futures options (CBOT) Eurodollar futures options.

Harvard University Economics 1813 “The Indebted Society” The Yield Curve Ronald W. Sellers, Chairman & CEO Atlantic Asset Management, L.L.C.

International Fixed Income Topic IVA: International Fixed Income Pricing - Hedging.

Finance 432: Managing Financial Risk for Insurers Longevity Risk.

Chapter 21 Value at Risk Options, Futures, and Other Derivatives, 8th Edition, Copyright © John C. Hull 2012.

Chapter 21 Value at Risk Options, Futures, and Other Derivatives, 8th Edition, Copyright © John C. Hull 2012.

Risk Management Jan Röman OM Technology Securities Systems AB.

An Interim Solution 13 th February 2009 John Edwards.

C H A P T E R 18 Long-Term Financing.

Chapter 4 Understanding Interest Rates. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 4-2 Present Value A dollar paid to you one year.

Financial Innovation for an Aging World Olivia S. Mitchell, John Piggott, Michael Sherris, and Shaun Yow.

© 2008 Pearson Education Canada4.1 Chapter 4 Understanding Interest Rates.

Managing a Portfolio of Weather Derivatives

Introduction to Credit Derivatives Uwe Fabich. Credit Derivatives 2 Outline  Market Overview  Mechanics of Credit Default Swap  Standard Credit Models.

Longevity Risk, Rare Event Premia and Securitization 08/06/2007 ARIA Annual Meeting 2007 Longevity Risk, Rare Event Premia and Securitization By Yijia.

Daniel Bauer Ulm University DFG Research Training Group 1100 Frederik Weber Ludwig-Maximilians-Universität München.

Hedging Financial Market Exposure Interest Rate Swaps Cross Currency Interest Rate Swaps.

Property-Liability Insurance Loss Reserve Ranges Based on Economic Value Stephen P. D’Arcy, FCAS, PhD Alfred Y. H. Au, Actuarial Student Liang Zhang, Actuarial.

Financial Aspects of Longevity Risk Gavin Jones Gavin Jones is a Strategy Research Actuary at Swiss Re, where he focuses on mortality risks undertaken.

Evaluation of The Measures Taken for Management of Longevity Risk ERSJ Workshop 2012: Financial Management & Economics of Health & Pension Plan Systems.

Discussion: Risk and Valuation of Contingent Catastrophe Bonds by Daniel Bauer and Florian Kramer Discussion by Patrick Brocket Longevity 5: Fifth International.

Optimal Distribution Rules for Defined Contribution Plans: What Can We Learn from Other Countries? Professor Jon Forman University of Oklahoma Eighth International.

University of New South Wales

Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 22.1 Interest Rate Derivatives: The Standard Market Models Chapter 22.

Why Normal Matters AEIC Load Research Workshop Why Normal Matters By Tim Hennessy RLW Analytics, Inc. April 12, 2005.

Will You Outlive Your Retirement Income?. 2 Everyone is Living Longer 1340 BC 1400 AD 1800 AD 1900 AD 2000 AD 2040 AD Source: “The Exponent of Life Expectancy”

Financial Risk Management of Insurance Enterprises Finding the Immunizing Investment for Insurance Liabilities: The Case of the SPDA.

CIA Annual Meeting LOOKING BACK…focused on the future.

Evolution of Insurance Securitization Stephen P. D’Arcy Fellow of the Casualty Actuarial Society Professor of Finance University of Illinois UNSW Actuarial.

Optimal Gradual Annuitization: Quantifying the Cost of Switching to Annuities Optimal Gradual Annuitization: Quantifying the Cost of Switching to Annuities.

Wei Sun Renmin University, Hanqing Advanced Institute of Economics and Finance and School of Finance Anthony Webb Center for Retirement Research at Boston.

Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 4-1 Present Value A dollar paid to you one year from now is less valuable than a dollar paid.

Mortality Regimes and Pricing Samuel H. Cox University of Manitoba Yijia Lin University of Nebraska - Lincoln Andreas Milidonis University of Cyprus &

5847 San Felipe, Suite 4100, Houston, Texas (713) (800) (713) (Fax) INVESTING IN RETIREMENT THE GAME HAS CHANGED … OR HAS.

Longevity Risk Transfer: A PPF Perspective Sixth International Longevity Risk and Capital Markets Solutions Conference 9 th & 10 th September 2010 Martin.

0 Forwards, futures swaps and options WORKBOOK By Ramon Rabinovitch.

Spatial Variability in Mortality and Socioeconomic Factors for Australian Mortality Sixth International Longevity Risk and Capital Markets Solutions Conference.

Life insurance and annuities Chapter 12. Two kinds of protection Mortality Longevity (life annuities) Combination.

© 2008 Morningstar, Inc. All rights reserved. 3/1/2008 LCN Role of Immediate Annuities in Retirement.

CIA Annual Meeting LOOKING BACK…focused on the future.

1 Chapter 06 Understanding Financial Markets and Institutions McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Andrew Baum and David Hartzell, Global Property Investment, 2011 Property derivatives – an introduction.

Chapter 28 Interest Rate Derivatives: The Standard Market Models Options, Futures, and Other Derivatives, 8th Edition, Copyright © John C. Hull

Annuities and Aggregate Mortality Risk Martin Weale National Institute of Economic and Social Research 11 th December 2015.

Financial Risk Management of Insurance Enterprises Review of Bond Pricing.

Longevity Risk Management and the Development of a Life Annuity Market in Australia John Evans and Michael Sherris Australian School of Business University.

Financial Risk Management of Insurance Enterprises Valuing Interest Rate Swaps.

May Yongjoo Song / Ewha GSIS.  A derivative in which two parties agree to exchange periodic payments  Payments  Calculated over a notional.

Present Value of Bond Depends –Time to Maturity(Duration) –Yield to Maturity or Market Interest Rate: Interest rate fluctuate depending on risk –Face Value.

Contact us: Call: Mail: Visit:

Placing Private Equity Through Equity Linked Notes (ELN) Presented by Global ARM Corporate Services.

Longevity Bonds or Securitizing Longevity Dr. Rodolfo Wehrhahn, ACLI.

Mortality and Longevity Research Mortality Working Group IAA Meeting, St Petersburg, Russia Friday May Michael Sherris CEPAR, AIPAR UNSW Business.

Optimal Longevity Risk Transfer and Investment Strategies

Developing life annuity products in Africa

12. Understanding Floating Rate and Derivative Securities

INTEREST RATE DERIVATIVE MARKETS

Creating effective and innovative index-based longevity solutions

Asset & Liability Management

Presentation transcript:

Longevity Risk Management and Static Hedging for Life and Variable Annuities Sixth International Longevity Risk and Capital Markets Solutions Conference Sydney Australia 9 and 10 September 2010 Michael Sherris (with Andrew Ngai) Australian School of Business, UNSW

Longevity Risk Life annuities and hedging instruments Market and mortality models Hedging strategies and effectiveness using Longevity Bonds and Derivatives Basis risk and market price of longevity risk Overview

Longevity Products - Retail Life Annuities, Deferred Annuities, Variable Annuities (+GLWB)

Pay actual (population) q x,t in exchange for agreed fixed q F x,t Individual ages and 5-yr Bucketed Longevity hedging: q-Forwards

Payments in line with actual survival probability S 65 (t) Longevity hedging: Coupon Longevity Bond

Static Hedging – ALM ALM interest rate risk only Simulated payments for static hedged portfolio

Static Hedging ALM with longevity derivatives

Static Hedging ALM with 20 year longevity bonds

Static Hedging ALM with longevity swap

Vector Error Correction Model with Regime Switching (RS- VECM) Long run equilibrium, volatility regimes Market Model – Economic Scenario Generator

Market model

–Models mortality rates in cohort direction –Logit age structure for rate changes (stationary) –Age dependence using principal components (errors are not iid) Mortality Model

Portfolio of annuitants – hedging instruments based on population index Mortality Basis Risk

Scenarios

Inflation indexed annuities have substantial shortfall risk from uncertain future inflation Shortfall risk – Life annuities

VA + GLWB provides limited longevity protection – hedging has little impact Shortfall risk – Deferred Life annuities + GLWB

Scenarios – Annuities (Life/Indexed)

Scenarios – Deferred Annuities + GLWB

Basis Risk and Hedging Effectiveness

Hedging Cost and Hedge Effectiveness

Static hedging (ALM) strategies reduce longevity risk particularly for life annuities (immediate and deferred) Much less effective for inflation indexed annuities (inflation risk predominates) VA with GLWB provides limited longevity protection and longevity hedging is of little value q-Forwards have additional basis risk over longevity bonds (mortality rates vs survival probabilities) Basis risk (annuitant vs population, bucketing) not critical for hedge effectiveness Cost of hedging (price of longevity risk) is an important factor for hedge effectiveness (both derivatives and longevity bonds) Summary and Main Conclusions