FRM Part I · FRM Exam Part I · The Building Blocks of Risk Management
Which activity of an insurance company or pension plan most clearly exposes it to longevity risk?
Paying lifetime annuities creates longevity risk, because if annuitants live longer than assumed the payments continue for more years than priced and reserved. Term life insurance suffers from early deaths instead, and catastrophe cover and T-bills are unrelated.
- AWriting property catastrophe cover
- BPaying lifetime annuities whose payouts last longer than assumedCorrect
- CHolding short-term government bills
- DSelling term life policies to young policyholders
Explanation
Longevity risk is that beneficiaries live longer than expected, extending payments. Lifetime annuities and defined benefit pensions are directly exposed. Term life policies lose money if deaths occur sooner, which is the opposite direction.
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