11 - Mortality and longevity risk Flashcards
What is mortality risk?
Mortality risk refers to the risk that there is a financial loss to the entity bearing the risk because too many individuals die quicker than they are expected to. An entity is only exposed to mortality risk if that entity incurs a cost as a result of death of an individual.
What is longevity risk?
Longevity risk refers to the risk that there is a financial loss because too many individuals live longer than they are expected to, making it more costly. An individual or entity bears this risk in the case of an individual continuing life, income, or retirement.
Name some products that expose the provider to mortality or longevity risk.
- A pension payable for life
- A lump sum death benefit
- An annuity type death benefit payable to the family of the deceased
- Medical scheme healthcare benefits
- Road accident fund compensating individuals for medical care arising from road accidents
- Road accident fund compensating individuals for earnings lost as a result of road accidents
- Critical illness cover
- Disability income cover
List entities that can be exposed to mortality risk.
- Families of uninsured individuals
- Retirement funds offering death benefits
- Insurers offering funeral cover / death benefits
- State or other national funds offering benefits on death
How can insurers providing death/funeral cover mitigate mortality risk?
- Reinsurance
- Underwriting
- Pricing margins
- Wellness or health initiatives
- Offering life annuity products
List entities that can be exposed to longevity risk.
- Uninsured individuals and their families
- Retirement funds paying pensions other than income drawdown products
- Employers paying post-retirement benefits
- Insurers offering pension products
- State or other national funds paying income benefits
- Insurers / providers / state paying health benefits
How can funds manage longevity risk?
- Buy-outs
- Buy-ins
- Longevity derivatives
What is a longevity swap?
A longevity swap is a contract between a fund and a swap provider that transfers the risk that pensioners live longer than expected from the fund to the swap provider.
How do employers mitigate longevity risk with post-retirement benefits?
- Use buy-out or buy-in strategies
- Increase subsidies based on medical inflation
- Ensure care is taken to match the subsidy promise in an outsourcing arrangement with inflation-linked annuity contracts
How can insurers offering pension products mitigate longevity risk?
- Add margins to the pricing
- Reinsure the risk
- Longevity swaps
