Participating Life Annuities Incorporating Longevity Risk Sharing Arrangements

In this paper we develop a conceptual framework for the payout phase in which annuityproviders and policyholders share longevity and investment risks in a ‡exible way. Tobe more precise, we develop an participating life annuity product in which systematiclongevity risk, i.e., the risk associated with systematic deviations from mortality ratesextracted from prospective life tables derived for the Portuguese population, is sharedbetween both counterparties. This will address some of the main demand and supplyconstraints in annuity markets, namely the inexistence of prospective life tables for thePortuguese population, the perception of unfair pricing, the consideration of bequestmotives, adverse selection problems or the lack of ...nancial instruments to hedge againstlongevity risk. Contrary to traditional GSA's, in which surviving policyholders bear bothsystematic and unsystematic longevity risk, we devise a contract in which, in exchange fora relatively small premium, annuitants will bear only the part of longevity that exceedspre-determined thresholds.