Gatzert N, Wesker H (2012)
Publication Language: English
Publication Type: Journal article, Original article
Publication year: 2012
Publisher: Emerald
Book Volume: 13
Pages Range: 396-423
Journal Issue: 5
DOI: 10.1108/15265941211273731
Purpose
Systematic mortality risk, i.e. the risk of unexpected changes in mortality and survival rates, can substantially impact a life insurers' risk and solvency situation. By using the “natural hedge” between life insurance and annuities, insurance companies have an effective tool for reducing their net‐exposure. The purpose of this paper is to analyze this risk management tool and to quantify its effectiveness in hedging against changes in mortality with respect to default risk measures.
Design/methodology/approach
To achieve this goal, the paper models the insurance company as a whole and takes into account the interaction between assets and liabilities. Systematic mortality risk is considered in two ways. First, systematic mortality risk is modeled using scenario analyses and, second, empirically observed changes in mortality rates for the last 10‐15 years are used.
Findings
The paper demonstrates that the consideration of both the asset and liability side is vital to obtain deeper insight into the impact of natural hedging on an insurer's risk situation and shows how to reach a desired safety level while simultaneously immunizing the portfolio against changes in mortality rates.
Originality/value
The paper contributes to the literature by considering the insurance company as a whole in a multi‐period setting and taking into account both, assets and liabilities, as well as their interaction. Furthermore, the paper shows how to obtain a desired safety level while simultaneously immunizing a portfolio against changes in default risk.
APA:
Gatzert, N., & Wesker, H. (2012). The Impact of Natural Hedging on a Life Insurer's Risk Situation. The Journal of Risk Finance, 13(5), 396-423. https://doi.org/10.1108/15265941211273731
MLA:
Gatzert, Nadine, and Hannah Wesker. "The Impact of Natural Hedging on a Life Insurer's Risk Situation." The Journal of Risk Finance 13.5 (2012): 396-423.
BibTeX: Download