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IAI Actuarial Core Principles · Business Management · Issues and challenges in each main practice area

An Indian life insurer wants to sell annuities to retirees and fears that policyholders will live longer than assumed. Which statement correctly describes the challenge and a suitable mitigant?

Longevity risk is the risk that annuitants live longer than assumed, which increases the cost of payments. It can be mitigated by allowing for mortality improvement in pricing and reserving and by transferring risk through reinsurance or longevity swaps. Early death helps annuity writers, so the other statements are incorrect.

  1. ALongevity risk is that annuitants outlive the pricing assumptions, and it can be mitigated by using mortality improvement projections and reinsurance or longevity swapsCorrect
  2. BLongevity risk is that annuitants die early, and it can be mitigated by selling more annuities
  3. CLongevity risk only affects term assurance and is removed by raising premiums
  4. DLongevity risk is eliminated because annuity payments are made monthly
  5. Longevity risk is the risk of equity falls and is mitigated by buying bonds only

Explanation

Annuity payments continue while the annuitant lives, so a longer life than assumed raises cost. Projecting improvements in mortality and transferring risk through reinsurance or longevity swaps are standard responses. Early death is favourable for annuity writers, not adverse.

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