An analysis of the relative risks of the lifetime annuity business & their management
The ageing of the world's population over the next 30 years means that there will be increased demand for products such as lifetime annuities to provide steady and reliable income streams to retirees. It has been known for some time that lifetime annuities bring significant risks to the issuer, but there has not been much research at the annuity portfolio level as to exactly what the major risks are, and how to manage them. This paper looks at pools of lifetime annuities, identifies the major risks, and then discusses the relative merits of alternative management techniques given the major risks are in the Knightian uncertain category. The paper concludes that lifetime annuities can be written, but the major risks require a national reinsurance approach to ensure sustainability.