Mortality Rate Modeling: A study of the effectiveness of longevity and mortality linked financial derivatives as hedging instruments in a pension risk management strategy
Private pension plan sponsors wishing to manage their longevity risk transfer it to insurers through annuity contracts or bespoke longevity swap arrangements. They increasingly rely on such contracts to reduce their risk exposure. For example, annuity purchase activity from Canadian private pension plans expanded from $1 billion in 2012 to almost $2.7 billion in 2016 (Willis Towers Watson (2017)). This trend is expected to accelerate as interest rates increase, since it will improve the financial position of defined benefit pension plans and at the same time it will lower the costs of buying annuities.