Understanding, Modeling and Managing Longevity Risk: Key Issues and Main Challenges

Pauline Barrieu (1) , Harry Bensusan (2) , Nicole El Karoui (2) , Caroline Hillairet (2) , Stéphane Loisel (3) , Claudia Ravanelli (4) , Yahia Salhi (3, 5)

1 Department of Statistics
2 CMAP - Centre de Mathématiques Appliquées - Ecole Polytechnique
3 SAF - Laboratoire de Sciences Actuarielle et Financière
4 Swiss Financial Institute
5 CERDALM

In this article we investigate the latest developments on longevity risk modeling. We first introduce longevity risk and some key actuarial definitions as to allow for a better understanding of the related challenges in term of risk management from both a financial and insurance point of view. The article also provides a global view on the practical issues on longevity-linked insurance and pension funds products that arise mainly from the steady increase in life expectancy since 1960s. Those issues are leading the industry to adopt more effective regulations to better assess and efficiently manage the inherited risks. Simultaneously, the development on the longevity has enhanced the need of capital markets as to manage and transfer the risk throughout the so-called insurance-linked securities (ILS). Therefore, we also highlight future developments on longevity risk management from a financial point of view, bringing up practices from the banking industry in terms of modeling and pricing.

Mots clés: population dynamics; Longevity Risk; securitization; risk transfer; incomplete market; life insurance; stochastic mortality; pensions; long term interest rate; regulation; population dynamics.

Domaines: Economies et finances

Pauline Barrieu, Harry Bensusan, Nicole El Karoui, Caroline Hillairet, Stéphane Loisel, et al.. Understanding, Modeling and Managing Longevity Risk: Key Issues and Main Challenges. 2009. ⟨hal-00417800v1⟩