How actuaries can help manage longevity risk

Longevity risk is the danger that we outlive our retirement savings. This involves the ensuing challenge to maintain the standard of living that we are accustomed to or afford the ever-increasing health care and retirement housing costs. Can actuaries help the public avoid this issue?

The focus on longevity risk is relatively new outside of the insurance industry. Until recently, the topic has not been largely discussed by pension plan sponsors, governments, and individuals whose focus is primarily on the management of investment risks.

Université de Sherbrooke’s Professor Alain Bélanger addresses longevity risk and how actuaries can manage it. In the report, Hedging longevity risk in the Canadian market, in collaboration with Sullivan Giannini and Christian Robert (FCIA), Bélanger looks at developing a liquid market of simple yet effective derivative instruments for the hedging of longevity risk.

The report presents the indexes and hedging instruments that would be helpful in capturing the variability of mortality rates so that only one mortality index would be required to cover the hedging of annuities or life insurance products for several retirement ages. These solutions should be practical and readily available to pension plans of all sizes as well as insurers and reinsurers.

Effective hedges for pension plans

The paper found that mortality and Kappa derivative instruments (forwards and puts) provide effective hedges for pension plans.

Bélanger explains, “Mortality instruments are simpler than kappa ones so their market may develop first. But in the long run, the Kappa instruments, requiring only one index for all cohorts of a specific gender and nationality, have the potential to offer greater liquidity.”

These instruments offer actuaries an array of solutions to reduce longevity risk. A liquid market of these instruments will moreover provide the opportunity to be proactive in the analysis and in the management of this risk.

Read the paper’s full findings to learn more about longevity risk.

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