Measuring and managing the longevity risk for an indexed life annuity

This paper investigates the problem of longevity risk sharing between an annuity provider and the annuitants. In this field, the idea of reducing the annuity periodic payments in similar way to what happens in the context of securitization is gaining. In the following the authors refer to a contract in which the installments of life annuities are scaled by a demographic index. The main finding is that, scaling the periodic installments, would result in a significant reduction in the level of benefits. The conditions that allow to limit the reduction of benefits without worsening the insurer's position is investigated. The conclusion is that it is possible to achieve an equilibrium not only reducing the amount of the periodic installments but also moving forward the retirement age. © Albina Orlando, Massimiliano Politano, 2013.