The challenge of managing longevity risk

Abstract

It is primarily longevity risks which are borne by pension, annuity and long-term care products. The demand for such products has been increasing rapidly, leading to rising concerns about how longevity risks should be properly managed. Difficulties in making long-term forecasts for life expectancies, adverse selection, shortsightedness, and moral hazard problems impede the sound assessment and pricing of such risks and the development of appropriate reinsurance markets. This paper discusses some possible approaches to improving the management of longevity risks. These include finite reinsurance and capital market solutions. It is stressed that governments could lend considerable support to the insurance industry by kick-starting markets for indexed long-term bonds. © 2005 Springer Berlin · Heidelberg.