Longevity Risk: Retirement Product Innovation and Risk Management Strategies
The significant uncertainty in financial returns and life expectancy experienced in many countries worldwide increasingly exposes individuals to the risk of outliving their retirement savings, known as longevity risk. This thesis proposes new retirement income products with various strategies for managing longevity risk. First, we introduce a retirement product to provide pensioners with a lifetime income characterized by smooth investment returns. Our proposed design builds on the advantages of sharing mortality risk while incorporating equity investments with return smoothing mechanisms. Based on Australian data, we establish transparent and costless minimum guarantees on market returns using a zero-cost collar option. The pension savings are divided into a group-self annuitization (GSA) account and a smoothing account. The GSA account provides life-long retirement benefits, while the smoothing account adjusts the GSA benefits within specified bounds. Our method uses the smoothing account as part of the pooled savings, not backed up by the insurer, a key feature of our new product. Second, we set an arrangement for sharing mortality, chronic illness, and functional disability risks in a pooled annuity fund using multi-state models of functional disability and health status. We make two contributions to the literature. First, we propose a theoretical framework for pooling mortality risk across multiple health states. Second, as a practical contribution, we introduce a ``pooled health care annuity product'', which integrates long-term care insurance with a pooled life annuity. Based on US Health and Retirement data, we estimate health transition rates and numerically illustrate the proposed arrangement using annuity payouts. Lastly, we investigate linked annuity products, in which insurers and policyholders share risks. We examine the realistic price of the risk retained by the provider under the joint presence of financial and longevity participation. The guarantee's price is determined based on periodic fees charged to the policy account value. We further explore trade-offs between the retained risk amount and the guarantee cost from individuals' and providers' perspectives. Based on Italian data, we present numerical findings of a financial-linked product, a longevity-linked product, and a financial and longevity-linked product. The mortality and interest rates are estimated using the arbitrage-free Nelson-Siegel model.
Longevity risk, Pooled annuity, Smoothing, Multi-state models
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