A benchmark for longevity swap prices

(Aug 1, 2013)

What should a reinsurer charge for longevity risk? Is it possible to benchmark longevity swap prices? One answer to these questions comes from an unlikely source: European Solvency II.

In recent years, longevity swaps have become a popular instrument in the U.K. for managing the longevity risk inherent in portfolios of pensions and annuities. The insurance company or pension scheme replaces uncertain future benefits paid out to pensioners or annuitants with a schedule of fixed reinsurance premiums. The reinsurer takes on the responsibility to pay the actual benefits and receives the fixed reinsurance premiums in return. These premiums will reflect the reinsurer's best estimate of future cash flows,

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Tags: longevity swap, reinsurance, Solvency II, Solvency Capital Requirement, SCR, risk margin, cost of capital

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