An Optimal Product Mix for Hedging Longevity Risk in Life Insurance Companies: The Immunization Theory Approach |
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| Authors: | Jennifer L Wang HC Huang Sharon S Yang Jeffrey T Tsai |
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| Institution: | Jennifer L. Wang is a professor at National Cheng‐chi University. H.C. Huang is an associate professor at National Cheng‐chih University. Sharon S. Yang is an associate professor at National Central University. Jeffrey T. Tsai is an assistant professor at National Tsing Hua University. Jennifer L. Wang can be contacted via e‐mail: jenwang@nccu.edu.tw. |
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| Abstract: | This article investigates the natural hedging strategy to deal with longevity risks for life insurance companies. We propose an immunization model that incorporates a stochastic mortality dynamic to calculate the optimal life insurance–annuity product mix ratio to hedge against longevity risks. We model the dynamic of the changes in future mortality using the well‐known Lee–Carter model and discuss the model risk issue by comparing the results between the Lee–Carter and Cairns–Blake–Dowd models. On the basis of the mortality experience and insurance products in the United States, we demonstrate that the proposed model can lead to an optimal product mix and effectively reduce longevity risks for life insurance companies. |
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