Optimal Longevity Risk Transfer and Investment Strategies

North American Actuarial Journal, Forthcoming

44 Pages Posted: 27 Jul 2017 Last revised: 27 May 2018

See all articles by Samuel H. Cox

Samuel H. Cox

University of Manitoba - Asper School of Business

Yijia Lin

University of Nebraska at Lincoln - Department of Finance

Sheen Liu

Washington State University

Date Written: May 23, 2018

Abstract

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

Cox, Samuel H. and Lin, Yijia and Liu, Sheen, Optimal Longevity Risk Transfer and Investment Strategies (May 23, 2018). North American Actuarial Journal, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3009489 or http://dx.doi.org/10.2139/ssrn.3009489

Samuel H. Cox

University of Manitoba - Asper School of Business ( email )

181 Freedman Crescent
Winnipeg, Manitoba R3T 5V4
Canada

Yijia Lin (Contact Author)

University of Nebraska at Lincoln - Department of Finance ( email )

Lincoln, NE 68588-0490
United States

Sheen Liu

Washington State University ( email )

Wilson Rd.
College of Business
Pullman, WA 99164
United States

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