Jump to ContentJump to Main Navigation
Show Summary Details
In This Section

The B.E. Journal of Economic Analysis & Policy

Editor-in-Chief: Jürges, Hendrik / Ludwig, Sandra

Ed. by Auriol , Emmanuelle / Brunner, Johann / Fleck, Robert / Mendola, Mariapia / Requate, Till / Schirle, Tammy / de Vries, Frans / Zulehner, Christine

4 Issues per year

IMPACT FACTOR 2016: 0.252
5-year IMPACT FACTOR: 0.755

CiteScore 2016: 0.48

SCImago Journal Rank (SJR) 2015: 0.501
Source Normalized Impact per Paper (SNIP) 2015: 0.418

See all formats and pricing
In This Section
Volume 7, Issue 1 (Jul 2007)


Volume 6 (2006)

Volume 4 (2004)

Volume 2 (2002)

Volume 1 (2001)

Life Is Cheap: Using Mortality Bonds to Hedge Aggregate Mortality Risk

Leora Friedberg
  • 1University of Virginia,
/ Anthony Webb
  • 2Center for Retirement Research at Boston College,
Published Online: 2007-07-11 | DOI: https://doi.org/10.2202/1935-1682.1785


Insurance companies, employer pension plans, and the U.S. government all provide annuities and therefore assume aggregate mortality risk. Using the widely-cited Lee-Carter mortality model, we quantify aggregate mortality risk as the risk that the average annuitant lives longer than is predicted by the model, and we determine that annuities expose providers to substantial risk. We also find that other recent actuarial forecasts lie at the edge or outside of Lee-Carter's 95% confidence interval, suggesting even more uncertainty about future mortality.We then evaluate the implications of aggregate mortality risk for insurance companies; this analysis can be extended to private pension providers and Social Security. Given the forecasts of the Lee-Carter model, we calculate that a markup of 3.9% on an annuity premium (or shareholders' capital equal to 3.9% of the expected present value of annuity payments) would be required to reduce the probability of insolvency resulting from aggregate mortality shocks to 5%, and a markup of 5.7% would reduce the probability of insolvency to 1%. Based on the same model, we find that a projection scale commonly referred to by the insurance industry underestimates aggregate mortality improvements and would leave annuities underpriced.Annuity providers could manage aggregate mortality risk more efficiently by transferring it to financial markets through mortality-contingent bonds. We calculate the returns that one recently proposed mortality bond would have paid had it been available over a long period. Using both the Capital and the Consumption Capital Asset Pricing Models, we determine the risk premium that investors would have required to hold the bond. At plausible coefficients of risk aversion, annuity providers should be able to hedge aggregate mortality risk via such bonds at very low cost.

Keywords: aggregate mortality risk; annuities; longevity bonds

About the article

Published Online: 2007-07-11

Citation Information: The B.E. Journal of Economic Analysis & Policy, ISSN (Online) 1935-1682, DOI: https://doi.org/10.2202/1935-1682.1785. Export Citation

Citing Articles

Here you can find all Crossref-listed publications in which this article is cited. If you would like to receive automatic email messages as soon as this article is cited in other publications, simply activate the “Citation Alert” on the top of this page.

David Blake, Andrew Cairns, Guy Coughlan, Kevin Dowd, and Richard MacMinn
Journal of Risk and Insurance, 2013, Volume 80, Number 3, Page 501
Andy Wong, Michael Sherris, and Ralph Stevens
Journal of Risk and Insurance, 2015, Page n/a
Michel M. Denuit
Journal of Computational and Applied Mathematics, 2009, Volume 230, Number 2, Page 411
David Blake, Christophe Courbage, Richard MacMinn, and Michael Sherris
The Geneva Papers on Risk and Insurance Issues and Practice, 2011, Volume 36, Number 4, Page 489
Min Zheng
Discrete Dynamics in Nature and Society, 2015, Volume 2015, Page 1
Bingzheng Chen, Lihong Zhang, and Lin Zhao
Insurance: Mathematics and Economics, 2010, Volume 47, Number 3, Page 358
David Blake, Richard MacMinn, Johnny Siu-Hang Li, and Mary Hardy
North American Actuarial Journal, 2014, Volume 18, Number 1, Page 1
Daniel Bauer, Matthias Börger, and Jochen Ruß
Insurance: Mathematics and Economics, 2010, Volume 46, Number 1, Page 139

Comments (0)

Please log in or register to comment.
Log in