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Mentioned in Dispatches
Response to - Longevity Hedge Effectiveness: A Decomposition by Pensions Institute http://bit.ly/kM7Cwe
Stuart McDonald • Like most insurance, the party taking on the risk charges a margin over and above their view of best estimate claims. "Claims" in this case being pension/annuity payments to pensioners/annuitants. The risk margin is the intended primary source of profits. Additionally, in some cass the risk taker may also take a more (financially) favourable view of best estimate claims (i.e. assume higher mortality -> lower future payments) than the party looking to divest the risk. The party divesting the risk is typically prepared to pay a premium for the certainty of known future liabilities. Additionally the converse of the above point is true - the party divesting the risk may perceive the trade to be no or low cost if their view of best estimate claims is materially higher than the risk taker's view. On top of this there are plenty of other parties turning a profit in all of this. Advisors (actuarial, legal, etc) will be required on all sides. Additionally there can be one or more intermediaries sitting between those divesting risk and the eventual risk takers, who are typically reinsurers at the moment. The intermediaries (who might be traditional insurers, specialist monolines, or captive insurers owned by investment banks) can charge a premium for their role matching buyers to sellers, and transforming the risk e.g. splitting out the liabilities of a trade between several reinsurers. The industry is in its infancy in much of the world, but is slightly more developed in the UK.
Dirk Alexander Oosthuyse • How does this industry make it's money?
ACTUARIAL POST JULY 2011
http://www.bit.ly/kM7Cwe
Table of Contents for the Digital Edition of Actuarial Post - Issue 3