Division of labour

(Jan 10, 2017)

At this time of year insurers have commenced their annual valuation of liabilities, part of which involves setting a mortality basis.  When doing so it is common for actuaries to separate the basis into two components: (i) the current, or period, mortality rates and (ii) the projection of the future path of mortality rates (usually mortality improvements).  This sub-division is carried over into the regular Solvency II assessment of capital requirements, where there is always a minimum of two sub-risks for longevity:

  1. Mis-estimation risk, i.e. the uncertainty over the current level of mortality.
  2. Trend risk, i.e. the uncertainty over the future direction of improvements.

In practice a Solvency II assessment…

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Tags: Valuation, Solvency II, mis-estimation risk, trend risk

Partial buy-outs

(Jul 14, 2009)

It is quite common for a pension scheme to want to reduce its risk, but to be unable to afford a full buy-out.  The question is how best to reduce risk with the funds available, i.e. which liabilities to buy out first.  One argument we have come across is to buy out the older pensioners first, since their life expectancy can be more volatile against your funding assumption.

The answer to this depends on what way you want to measure the risk.  If you are looking at the possible percentage change in life expectancy or reserve, then older pensioners do indeed have a higher volatility: an extra year of life is proportionately larger compared to the baseline life expectancy (similarly for reserves).  Reserve calculations…

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Tags: buy-out, concentration risk, trend risk, tail risk

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