{"title":"Contract Structure and Risk Aversion in Longevity Risk Transfers","authors":"David Landriault, Bin Li, Hong Li, Yuanyuan Zhang","doi":"arxiv-2409.08914","DOIUrl":null,"url":null,"abstract":"This paper introduces an economic framework to assess optimal longevity risk\ntransfers between institutions, focusing on the interactions between a buyer\nexposed to long-term longevity risk and a seller offering longevity protection.\nWhile most longevity risk transfers have occurred in the reinsurance sector,\nwhere global reinsurers provide long-term protections, the capital market for\nlongevity risk transfer has struggled to gain traction, resulting in only a few\nshort-term instruments. We investigate how differences in risk aversion between\nthe two parties affect the equilibrium structure of longevity risk transfer\ncontracts, contrasting `static' contracts that offer long-term protection with\n`dynamic' contracts that provide short-term, variable coverage. Our analysis\nshows that static contracts are preferred by more risk-averse buyers, while\ndynamic contracts are favored by more risk-averse sellers who are reluctant to\ncommit to long-term agreements. When incorporating information asymmetry\nthrough ambiguity, we find that ambiguity can cause more risk-averse sellers to\nstop offering long-term contracts. With the assumption that global reinsurers,\nacting as sellers in the reinsurance sector and buyers in the capital market,\nare generally less risk-averse than other participants, our findings provide\ntheoretical explanations for current market dynamics and suggest that\nshort-term instruments offer valuable initial steps toward developing an\nefficient and active capital market for longevity risk transfer.","PeriodicalId":501273,"journal":{"name":"arXiv - ECON - General Economics","volume":"77 1","pages":""},"PeriodicalIF":0.0000,"publicationDate":"2024-09-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"arXiv - ECON - General Economics","FirstCategoryId":"1085","ListUrlMain":"https://doi.org/arxiv-2409.08914","RegionNum":0,"RegionCategory":null,"ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"","JCRName":"","Score":null,"Total":0}
引用次数: 0
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.