Mortality-Indexed AnnuitiesManaging Longevity Risk via Product Design

Longevity risk has become a major challenge for governments, individuals, andannuity providers in most countries, and especially its aggregate form, i.e. therisk of unsystematic changes to general mortality patterns, bears a large potentialfor accumulative losses for insurers. As obvious risk management tools such as(re)insurance or hedging are less suited to manage an annuity provider’s exposureto aggregate longevity risk, the current paper proposes a new type of life annuitieswith benefits contingent on actual mortality experience, and it also details actuarialaspects of implementation. Similar adaptations to conventional product designexist in investment-linked annuities, and a role model for long-term contracts contingenton actual cost experience is found in German private health insurance sothat the idea is not novel in general, but it is in the context of longevity risk.By not or re-transferring the systematic longevity risk insurers may avoid accumulativelosses so that the primary focus in an extensive Monte-Carlo simulationis on the question of whether and to what extent such products are also advantageousfor policyholders in contrast to a comparable conventional annuity product....