Optimal Longevity Risk Transfer and Investment Strategies
North American Actuarial Journal, Forthcoming
44 Pages Posted: 27 Jul 2017 Last revised: 27 May 2018
Date Written: May 23, 2018
Given the rising cost of maintaining defined benefit (DB) pensions, there has been a surge of activities in recent years by DB plan sponsors to transfer their pension risk through strategies such as buy-ins and buy-outs. As buy-in and buy-out transaction pipelines grow, insurers actively participating in the buy-in and buy-out markets are exposed to significant longevity risk embedded in pension schemes. In this paper, we investigate how to maximize a bulk annuity insurer’s value with reinsurance and/or longevity securities, subject to constraints that control longevity and investment risks as well as an overall risk. We apply duality and the martingale approach to derive an optimal longevity risk transfer strategy. Our results show that longevity risk transfer interacts with an insurer’s investment decision for value maximization. Our analysis also highlights the interdependence of different longevity risk management tools to achieve an overall risk target.
Keywords: Pension Buy-Ins and Buy-Outs, Bulk Annuity Insurers, Longevity Risk Transfer, Duality in Optimization
JEL Classification: G22, G32
Suggested Citation: Suggested Citation