Designing Longevity Risk Transfers: The Point of View of the Cedant

Abstract

This paper focuses on longevity risk, i.e. the risk coming from the random evolution of mortality at adult ages. Tools to face such risk when managing life annuities are discussed, namely capital allocation and risk transfers. With regard to the latter, taking example from traditional reinsurance arrangements, an Excess of Loss risk transfer, involving the duration of each annuity in the portfolio, and Stop-Loss arrangements, linking the counter party's intervention to either assets backing the portfolio reserve or to annual cash flows, are dealt with. The amounts of capital required in the different situations are then compared, within a simplified probabilistic framework.

Keywords: Mortality trends, longevity risk, reserving, solvency requirements, target capital, internal models, XL risk transfer, Stop-Loss risk transfer, reinsurance, longevity bond

JEL Classification: C00, G22