Natural Hedging of Life and Annuity Mortality Risks
North American Actuarial Journal, Vol. 11, No. 3, pp. 1-15, 2007
27 Pages Posted: 7 May 2007 Last revised: 22 Jan 2016
Date Written: May 1, 2007
The values of life insurance and annuity liabilities move in opposite directions in response to a change in the underlying mortality. Natural hedging utilizes this to stabilize aggregate liability cash flows. We find empirical evidence that suggests that annuity writing insurers who have more balanced business in life and annuity risks also tend to charge lower premiums than otherwise similar insurers. This indicates that insurers who have a natural hedge have a competitive advantage. In addition, we show how a mortality swap might be used to provide the benefits of natural hedging.
Keywords: Mortality, Hedging, Swaps, Annuity, Life Insurance
JEL Classification: G2
Suggested Citation: Suggested Citation