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arXiv · 2409.08914

Contract Structure and Risk Aversion in Longevity Risk Transfers

David Landriault·Bin Li·Hong Li·Yuanyuan Zhang
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Abstract

This paper introduces an economic framework to assess optimal longevity risk transfers between institutions, focusing on the interactions between a buyer exposed to long-term longevity risk and a seller offering longevity protection. While most longevity risk transfers have occurred in the reinsurance sector, where global reinsurers provide long-term protections, the capital market for longevity risk transfer has struggled to gain traction, resulting in only a few short-term instruments. We investigate how differences in risk aversion between the two parties affect the equilibrium structure of longevity risk transfer contracts, contrasting `static' contracts that offer long-term protection with `dynamic' contracts that provide short-term, variable coverage. Our analysis shows that static contracts are preferred by more risk-averse buyers, while dynamic contracts are favored by more risk-averse sellers who are reluctant to commit to long-term agreements. When incorporating information asymmetry through ambiguity, we find that ambiguity can cause more risk-averse sellers to stop offering long-term contracts. With the assumption that global reinsurers, acting as sellers in the reinsurance sector and buyers in the capital market, are generally less risk-averse than other participants, our findings provide theoretical explanations for current market dynamics and suggest that short-term instruments offer valuable initial steps toward developing an efficient and active capital market for longevity risk transfer.

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David Landriault, Bin Li, Hong Li, Yuanyuan Zhang. 2024-09-13. Contract Structure and Risk Aversion in Longevity Risk Transfers. https://arxiv.org/abs/2409.08914

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