SECURITIZATION OF MORTALITY RISKS IN LIFE ANNUITIES YIJIA LIN AND SAMUEL H. COX Доклад подготовила студентка 61УРАМ Ящук М.

Individual Annuity Market in the United States Baby boom the baby boom cohort in the USA nears and moves into retirement => increased attention to issues of old-age income security Social Security Reform

Demand for Mortality Based Securities There is some relation between mortality securities and equity market returns But investors may buy mortality based bonds as a diversification, even if mortality risk has a positive or negative correlation with the market.

Supply of Mortality Based Securities Hedging longevity risk (in comparison with reinsurance) lower costs in the long run more favorable contracts elimination of default risk Raising Required Capital

Securitization vs. reinsurance SecuritizationReinsurance Publicly traded or private placementPrivate placement Based on liabilities for a cohort defined at issue Pricing and capacity are cyclical and reflective of recent underwriting results Bonds carry credit–rating No credit–rating for the insurance contract Collateralized bonds have no default risk Reinsurance buyer bears de- fault risk. Bonds are loans for tax purposesReinsurance transactions can produce taxable income to the buyer. More regulatory burdenLess regulatory burden Long-term fundingShort-term funding Exclude or minimize underwriting risks.Include underwriting risks. More regulatory concernsLess regulatory concerns High capacityLow capacity

Difficulties in Accurate Mortality Projection Different Opinions in Mortality Trend. Technical Difficulties in Mortality Projections Quality of Data Projection Models

Mortality Swaps (1)

Mortality Swaps (2)

Wang‘s method of pricing risks (1)

Wang‘s method of pricing risks (2)

Market price of risk λ

Mortality Bond Structure (1)

Mortality Bond Structure (2)

Mortality Bond Structure (3)

Mortality Bond Structure (4)

Mortality Bond Structure (5) The bondholders are more likely to get the coupons in the earlier years than in the later years The price of the mortality bond will be where d(0,t) is the discount factor based on the risk free interest rate term structure at the time the bond is issued F – the face amount

Insurer’s mortality bond hedge The insurer sells k bonds At the same time the insurer buys k straight bonds with the same coupon rate as the annuity-based bonds

Conclusions (1) There is a growing demand for a long term hedge against improving annuity mortality There is a trend of privatizing social securities systems with insurers taking more longevity risk Insurers will need increased capacity to take on longevity risk and securities markets can provide it

Conclusions (2) Compared with the reinsurance market, securitization of mortality risks has longer duration higher capacity possibly lower cost It can help solve the difficulties in managing annuity mortality risk.