Longevity risk, cost of capital and hedging for life insurers under Solvency II

2014 ◽  
Vol 55 ◽  
pp. 147-155 ◽  
Author(s):  
Ramona Meyricke ◽  
Michael Sherris
Keyword(s):  
Cost Of Capital ◽  
Solvency Ii ◽  
Longevity Risk ◽  
Life Insurers ◽  
Risk Cost

scholarly journals Pricing of Longevity Derivatives and Cost of Capital

Risks ◽  
2019 ◽  
Vol 7 (2) ◽  
pp. 41 ◽  
Author(s):  
Fadoua Zeddouk ◽  
Pierre Devolder
Keyword(s):  
Financial Markets ◽  
Time Horizon ◽  
Cost Of Capital ◽  
Solvency Ii ◽  
Longevity Risk ◽  
Policy Makers ◽  
Academic Researchers ◽  
Belgian Population ◽  
One Year ◽  
Longevity Bonds

Annuities providers become more and more exposed to longevity risk due to the increase in life expectancy. To hedge this risk, new longevity derivatives have been proposed (longevity bonds, q-forwards, S-swaps…). Although academic researchers, policy makers and practitioners have talked about it for years, longevity-linked securities are not widely traded in financial markets, due in particular to the pricing difficulty. In this paper, we compare different existing pricing methods and propose a Cost of Capital approach. Our method is designed to be more consistent with Solvency II requirement (longevity risk assessment is based on a one year time horizon). The price of longevity risk is determined for a S-forward and a S-swap but can be used to price other longevity-linked securities. We also compare this Cost of capital method with some classical pricing approaches. The Hull and White and CIR extended models are used to represent the evolution of mortality over time. We use data for Belgian population to derive prices for the proposed longevity linked securities based on the different methods.

scholarly journals A review of the risk margin – Solvency II and beyond

2020 ◽  
Vol 25 ◽  
Author(s):  
A. J. Pelkiewicz ◽  
S. W. Ahmed ◽  
P. Fulcher ◽  
K. L. Johnson ◽  
S. M. Reynolds ◽  
...  
Keyword(s):  
Cost Of Capital ◽  
Working Party ◽  
Solvency Ii ◽  
Risk Margin ◽  
Life Insurers ◽  
Wide Range ◽  
The Difference ◽  
Set Up ◽  
The Uk ◽  
The Impact

Abstract For life insurers in the United Kingdom (UK), the risk margin is one of the most controversial aspects of the Solvency II regime which came into force in 2016. The risk margin is the difference between the technical provisions and the best estimate liabilities. The technical provisions are intended to be market-consistent, and so are defined as the amount required to be paid to transfer the business to another undertaking. In practice, the technical provisions cannot be directly calculated, and so the risk margin must be determined using a proxy method; the method chosen for Solvency II is known as the cost-of-capital method. Following the implementation of Solvency II, the risk margin came under considerable criticism for being too large and too sensitive to interest rate movements. These criticisms are particularly valid for annuity business in the UK – such business is of great significance to the system for retirement provision. A further criticism is that mitigation of the impact of the risk margin has led to an increase in reinsurance of longevity risks, particularly to overseas reinsurers. This criticism has led to political interest, and the risk margin was a major element of the Treasury Committee inquiry into EU Insurance Regulation. The working party was set up in response to this criticism. Our brief is to consider both the overall purpose of the risk margin for life insurers and solutions to the current problems, having regard to the possibility of post-Brexit flexibility. We have concluded that a risk margin in some form is necessary, although its size depends on the level of security desired, and so is primarily a political question. We have reviewed possible alternatives to the current risk margin, both within the existing cost-of-capital methodology and considering a wide range of alternatives. We believe that requirements for the risk margin will depend on future circumstances, in particular relating to Brexit, and we have identified a number of possible changes to methodology which should be considered, depending on circumstances.

Insurance accounting: a new era?

2012 ◽  
Vol 17 (3) ◽  
pp. 562-615 ◽  
Author(s):  
K. Foroughi ◽  
C. R. Barnard ◽  
R.W. Bennett ◽  
D. K. Clay ◽  
E. L. Conway ◽  
...  
Keyword(s):  
Solvency Ii ◽  
Black Box ◽  
Supplementary Information ◽  
New Era ◽  
Insurance Contracts ◽  
Life Insurers ◽  
Reporting Requirements ◽  
Disclosure Requirements ◽  
Recent Developments ◽  
Key Issues

AbstractInsurance accounting has for many years proved a challenging topic for standard setters, preparers and users, often described as a “black box”. Will recent developments, in particular the July 2010 Insurance Contracts Exposure Draft, herald a new era?This paper reviews these developments, setting out key issues and implications. It concentrates on issues relevant to life insurers, although much of the content is also relevant to non-life insurers.The paper compares certain IFRS and Solvency II developments, recognising that UK insurers face challenges in implementing new financial and regulatory reporting requirements in similar timeframes. The paper considers resulting external disclosure requirements and a possible future role for supplementary information.

scholarly journals Accounting-Based Downside Risk, Cost of Capital, and the Macroeconomy

2015 ◽  
Author(s):  
Yaniv Konchitchki ◽  
Yan Luo ◽  
Mary L. Z. Ma ◽  
Feng Wu
Keyword(s):  
Cost Of Capital ◽  
Downside Risk ◽  
Risk Cost

scholarly journals Maximum Market Price of Longevity Risk Under Solvency Regimes: The Case Of Solvency II

2017 ◽  
Author(s):  
Susanna Levantesi ◽  
Massimiliano Menzietti
Keyword(s):  
Market Price ◽  
Solvency Ii ◽  
Insurance Companies ◽  
Longevity Risk ◽  
Risk Margin ◽  
Maximum Price ◽  
Upper Limits ◽  
Forward Prices ◽  
Pricing Measure ◽  
Solvency Regimes

Longevity risk constitutes an important risk factor for life insurance companies and it can be managed through longevity-linked securities. The market of longevity-linked securities is at present far from being complete and does not allow to find a unique pricing measure. We propose a method to estimate the maximum market price of longevity risk depending on the risk margin implicit within the calculation of the technical provisions as defined by Solvency II. The maximum price of longevity risk is determined for a survivor forward (S-forward), an agreement between two counterparties to exchange at maturity a fixed survival-dependent payment for a payment depending on the realized survival of a given cohort of individuals. The maximum prices determined for the S-forwards can be used to price other longevity-linked securities, such as q-forwards. The Cairns-Blake-Dowd model is used to represent the evolution of mortality over time, that combined with the information on the risk margin, enables us to calculate upper limits for the risk-adjusted survival probabilities, the market price of longevity risk and the S-forward prices. Numerical results can be extended for the pricing of other longevity-linked securities.

scholarly journals Longevity Risk Measurement of Life Annuity Products

Risks ◽  
2020 ◽  
Vol 8 (1) ◽  
pp. 31
Author(s):  
Pauline Milaure Ngugnie Diffouo ◽  
Pierre Devolder
Keyword(s):  
Numerical Analysis ◽  
Solvency Ii ◽  
Expected Value ◽  
Risk Measurement ◽  
Longevity Risk ◽  
Life Annuity ◽  
The Future ◽  
Solvency Capital ◽  
The Mean

This paper captures and measures the longevity risk generated by an annuity product. The longevity risk is materialized by the uncertain level of the future liability compared to the initially foretasted or expected value. Herein we compute the solvency capital (SC) of an insurer selling such a product within a single risk setting for three different life annuity products. Within the Solvency II framework, we capture the mortality of policyholders by the mean of the Hull–White model. Using the numerical analysis, we identify the product that requires the most SC from an insurer and the most profitable product for a shareholder. For policyholders we identify the cheapest product by computing the premiums and the most profitable product by computing the benefit levels. We further study how sensitive the SC is with respect to some significant parameters.

scholarly journals Mortality data reliability in an internal model

2020 ◽  
Vol 14 (2) ◽  
pp. 420-444
Author(s):  
Fabrice Balland ◽  
Alexandre Boumezoued ◽  
Laurent Devineau ◽  
Marine Habart ◽  
Tom Popa
Keyword(s):  
Data Quality ◽  
Internal Model ◽  
Mortality Rates ◽  
Solvency Ii ◽  
West Germany ◽  
Mortality Data ◽  
Longevity Risk ◽  
Capital Requirement ◽  
Stochastic Mortality ◽  
The Impact

AbstractIn this paper, we discuss the impact of some mortality data anomalies on an internal model capturing longevity risk in the Solvency 2 framework. In particular, we are concerned with abnormal cohort effects such as those for generations 1919 and 1920, for which the period tables provided by the Human Mortality Database show particularly low and high mortality rates, respectively. To provide corrected tables for the three countries of interest here (France, Italy and West Germany), we use the approach developed by Boumezoued for countries for which the method applies (France and Italy) and provide an extension of the method for West Germany as monthly fertility histories are not sufficient to cover the generations of interest. These mortality tables are crucial inputs to stochastic mortality models forecasting future scenarios, from which the extreme 0.5% longevity improvement can be extracted, allowing for the calculation of the solvency capital requirement. More precisely, to assess the impact of such anomalies in the Solvency II framework, we use a simplified internal model based on three usual stochastic models to project mortality rates in the future combined with a closure table methodology for older ages. Correcting this bias obviously improves the data quality of the mortality inputs, which is of paramount importance today, and slightly decreases the capital requirement. Overall, the longevity risk assessment remains stable, as well as the selection of the stochastic mortality model. As a collateral gain of this data quality improvement, the more regular estimated parameters allow for new insights and a refined assessment regarding longevity risk.

scholarly journals MODELING THE MORTALITY TREND UNDER MODERN SOLVENCY REGIMES

2013 ◽  
Vol 44 (1) ◽  
pp. 1-38 ◽  
Author(s):  
Matthias Börger ◽  
Daniel Fleischer ◽  
Nikita Kuksin
Keyword(s):  
Solvency Ii ◽  
Capital Requirements ◽  
Longevity Risk ◽  
Mortality Trend ◽  
Swiss Solvency Test ◽  
Solvency Capital ◽  
Simultaneous Modeling ◽  
One Year ◽  
The One ◽  
Solvency Regimes

AbstractStochastic modeling of mortality/longevity risks is necessary for internal models of (re)insurers under the new solvency regimes, such as Solvency II and the Swiss Solvency Test. In this paper, we propose a mortality model which fulfills all requirements imposed by these regimes. We show how the model can be calibrated and applied to the simultaneous modeling of both mortality and longevity risk for several populations. The main contribution of this paper is a stochastic trend component which explicitly models changes in the long-term mortality trend assumption over time. This allows to quantify mortality and longevity risk over the one-year time horizon prescribed by the solvency regimes without relying on nested simulations. We illustrate the practical ability of our model by calculating solvency capital requirements for some example portfolios, and we compare these capital requirements with those from the Solvency II standard formula.

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