Assessing and hedging the impact of longevity risk for countries with limited data

Abstract

Almost all literature on the impact of longevity concludes that its impact is huge and can collapse any life or pension company if steps are not taken to address it. Yet, life companies in most developing countries do not account for longevity risk. This is a result of the lack of suitable mortality data needed for such valuation. In this work, we have proposed a generalized method of assessing the impact of longevity risk when mortality data is scarce and shown theoretically that our earlier proposed method is a particular case. This means that this method can be used by not just pension companies but all life companies. The method is based on our earlier proposed model which shows that there is a nearly linear relationship between annuitant’s hazard function and their mortality at higher ages (post-retirement age) which permits approximating post-retirement mortality data with the Gompertz model. The work also considers how such a risk could be managed under the assumption of limited mortality data, and shows that a range of life products whose expected return depends on the distribution of individual lifetimes could be used to hedge such a risk. Specifically, we showed how a whole life annuity product could be used to hedge such a risk.