The demand for longevity guarantees remains low due to high costs, in spite of the protection they can offer for various risks to which individuals are exposed at old age. Longevity-linked products with flexible guarantees and related solutions have gained popularity in recent years due to their cost-effectiveness. We investigate linked annuity products, in which insurers and policyholders share risks. Our motivation stems from the need to reduce the guarantees' prices to policyholders and the default risk faced by providers due to financial and systematic longevity risks, while preserving a lifetime benefit, above a minimum amount. We propose a framework for pricing longevity and financial guarantees based on periodic fees charged to the policy fund value. The benefit amount is updated to the mortality and financial experience, allowing participation in mortality/ longevity experience and return on investments. Based on the affine stochastic model, particularly the Arbitrage Free Nelson Siegel (AFNS) framework, we advise the realistic price of the risk retained by the provider. We illustrate our ideas numerically using three products: a financial linked product, a longevity linked product and a financial longevity linked product.

Find the Q&A here: Q&A on 'Annuities from Several Perspectives'