Geographical Diversification and Longevity Risk Mitigation in Annuity Portfolios

30 Pages Posted: 31 Dec 2019

See all articles by Clemente De Rosa

Clemente De Rosa

University of Turin - Collegio Carlo Alberto

Elisa Luciano

Collegio Carlo Alberto; University of Turin - Department of Statistics and Applied Mathematics

Luca Regis

University of Turin

Date Written: December 10, 2019

Abstract

This paper provides a method to assess the risk relief deriving from a foreign expansion by a life-insurance company. We build a parsimonious continuous-time model for longevity risk, that captures the dependence across different ages in domestic versus foreign populations. We provide three measures of the diversification effects of expanding an annuity portfolio toward a foreign population. The reduction in the risk margin, computed à la Solvency II, provides a regulation-consistent measure of the benefit in the tail risk. The change in the volatility of the average mortality intensity of a portfolio provides an intuitive measure of the change in the longevity risk of a portfolio. The Diversification Index provides a synthetic assessment of the diversification benefit of combining different populations in one portfolio. We calibrate the model to portray the case of a UK annuity portfolio expanding internationally towards Italian policyholders. Our application shows that the longevity risk diversidication benefits of an international expansion are sizable, in particular when interest rates are low.

Keywords: geographical diversification, life insurance, risk management, multipopulation mortality, longevity risk modeling, Solvency II capital requirements

JEL Classification: F23, F65, G15, G22

Suggested Citation

De Rosa, Clemente and Luciano, Elisa and Regis, Luca, Geographical Diversification and Longevity Risk Mitigation in Annuity Portfolios (December 10, 2019). Available at SSRN: https://ssrn.com/abstract=3501701 or http://dx.doi.org/10.2139/ssrn.3501701

Clemente De Rosa

University of Turin - Collegio Carlo Alberto ( email )

via Real Collegio 30
Moncalieri, Torino 10024
Italy

Elisa Luciano

Collegio Carlo Alberto ( email )

via Real Collegio 30
Moncalieri, Torino 10024
Italy

HOME PAGE: http://www.carloalberto.org/people/faculty/fellows/luciano/

University of Turin - Department of Statistics and Applied Mathematics ( email )

Corso Unione Sovietica 218 bis
Turin, I-10122
Italy
+ 39 011 6705230 (Phone)

Luca Regis (Contact Author)

University of Turin ( email )

Corso Unione Sovietica 218 bis
Torino, Turin 10100
Italy

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