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    On the effectiveness of natural hedging for insurance companies and pension plans

    Access Status
    Fulltext not available
    Authors
    Li, Ka Ki Jackie
    Haberman, S.
    Date
    2015
    Type
    Journal Article
    
    Metadata
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    Citation
    Li, K.K.J. and Haberman, S. 2015. On the effectiveness of natural hedging for insurance companies and pension plans. Insurance: Mathematics and Economics. 61: pp. 286-297.
    Source Title
    Insurance: Mathematics and Economics
    DOI
    10.1016/j.insmatheco.2015.01.009
    ISSN
    0167-6687
    School
    Department of Mathematics and Statistics
    URI
    http://hdl.handle.net/20.500.11937/35078
    Collection
    • Curtin Research Publications
    Abstract

    Natural hedging is one possible method to reduce longevity risk exposure for an annuity provider or a pension plan. In this paper, we provide an assessment of the effectiveness of natural hedging between annuity and life products, using the correlated Poisson Lee–Carter model, Poisson common factor model, product-ratio model, and historical simulation. Our analysis is based on the mortality experience of UK assured lives, pensioners, and annuitants, and the national population of England and Wales. We consider a range of different scenarios, and find that the level of risk reduction is significant in general, with an average of around 60%. These results have important implications for those insurers, reinsurers, and pension plan sponsors who are seeking ways to hedge their unwanted risk exposures.

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