Assessing Investment and Longevity Riskswithin Immediate Annuities

Life annuities provide a guaranteed income for the remainder of the recipi-ent’s lifetime, and therefore, annuitization presents an important option whenchoosing an adequate investment strategy for the retirement ages. While thereare numerous research articles studying annuities from a pensioner’s point ofview, thus far there have been few contributions considering annuities fromthe provider’s perspective. In particular, to date there are no surveys of thegeneral risks within annuity books.The present paper aims at filling this gap: Using a simulation framework,it provides a long-term analysis of the risks within annuity books. In partic-ular, the joint impact of mortality risks and investment risks as well as theirrespective influences on the insurer’s financial situation are studied.The key finding is that, under the model specifications and using annu-ity data from the United Kingdom, the risk premium charged for aggregatemortality risk seems to be very large relative to its characteristics. Possiblereasons as well as economic implications are provided, and potential caveatsare discussed....