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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

Samuel H. Cox

University of Manitoba - Asper School of Business

Yijia Lin

University of Nebraska at Lincoln - Department of Finance

Date Written: May 1, 2007

Abstract

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

Cox, Samuel H. and Lin, Yijia, Natural Hedging of Life and Annuity Mortality Risks (May 1, 2007). North American Actuarial Journal, Vol. 11, No. 3, pp. 1-15, 2007. Available at SSRN: https://ssrn.com/abstract=984630

Samuel 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

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