Life Insurer Longevity Risk Management, Solvency and Shareholder Value

34 Pages Posted: 26 Nov 2013 Last revised: 2 Dec 2013

See all articles by Craig Blackburn

Craig Blackburn

University of New South Wales (UNSW) - School of Actuarial Studies; ARC Centre of Excellence in Population Ageing Research (CEPAR)

Katja Hanewald

UNSW Sydney - School of Risk & Actuarial Studies and ARC Centre of Excellence in Population Ageing Research (CEPAR)

Annamaria Olivieri

University of Parma - Dipartimento di Scienze Economiche e Aziendali

Michael Sherris

University of New South Wales - ARC Centre of Excellence in Population Ageing Research and School of Risk and Actuarial Studies; UNSW Australia Business School

Date Written: November 29, 2013

Abstract

This paper assesses the impact of longevity risk management on insurer shareholder value and solvency for an annual portfolio. The analysis uses a multi-period stochastic mortality model with both systematic and idiosyncratic longevity risk. We consider both survivor, or longevity, swaps that provide a full longevity risk hedge, and index-based survivor, or longevity, bonds that do not hedge idiosyncratic longevity risk. Shareholder value includes the impact of the costs of transferring longevity risk, policyholder demand elasticity, regulatory capital requirements, capital relief, and frictional costs including the insolvency put option, agency costs, and financial distress costs. Shareholder value is based on Economic Value (EV) and a Market-Consistent Embedded Value (MCEV) approach. Capital management is assessed based on a recapitalization and dividend strategy that maintains regulatory capital requirements, as defined under Solvency II. We demonstrate how longevity risk management strategies significantly reduce the volatility of shareholder value and frictional costs. Longevity risk management reduces the probability of insolvency, increases policyholder demand and hence increases shareholder value.

Keywords: longevity risk, capital management, solvency, reinsurance, securitization

JEL Classification: G22, G23, G32

Suggested Citation

Blackburn, Craig and Hanewald, Katja and Olivieri, Annamaria and Sherris, Michael, Life Insurer Longevity Risk Management, Solvency and Shareholder Value (November 29, 2013). UNSW Australian School of Business Research Paper No. 2013ACTL20. Available at SSRN: https://ssrn.com/abstract=2359222

Craig Blackburn (Contact Author)

University of New South Wales (UNSW) - School of Actuarial Studies ( email )

Sydney, NSW 2052
Australia

ARC Centre of Excellence in Population Ageing Research (CEPAR) ( email )

Level 6, Central Lobby (enter via East Lobby)
Australian School of Business Building
Sydney, New South Wales NSW 2052
Australia

Katja Hanewald

UNSW Sydney - School of Risk & Actuarial Studies and ARC Centre of Excellence in Population Ageing Research (CEPAR) ( email )

School of Risk & Actuarial Studies
UNSW Sydney
Sydney, New South Wales NSW 2052
Australia

Annamaria Olivieri

University of Parma - Dipartimento di Scienze Economiche e Aziendali ( email )

via Kennedy 6
Parma, 43125
Italy

Michael Sherris

University of New South Wales - ARC Centre of Excellence in Population Ageing Research and School of Risk and Actuarial Studies ( email )

UNSW Business School
Risk and Actuarial Studies
Sydney, NSW 2052
Australia
+61 2 9385 2333 (Phone)
+61 2 9385 1883 (Fax)

HOME PAGE: http://www.asb.unsw.edu.au/schools/Pages/MichaelSherris.aspx

UNSW Australia Business School ( email )

Sydney, NSW 2052
Australia

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