Natural Hedging of Life and Annuity Mortality Risks

The values of life insurance and annuity liabilities move in opposite directions in response to a change in the underlying mortality. Natural hedging utilizes this to stabilize aggregate liability cash flows. Our study shows empirical evidence that insurers who utilize natural hedging also charge lower premiums than otherwise similar insurers. This indicates that insurers who are able to utilize natural hedging have a competitive advantage. In addition, we show how a mortality swap might be used to provide the benefits of natural hedging to a firm that writes only one of the lines of business.

Publication Information
Article Title: Natural Hedging of Life and Annuity Mortality Risks
Journal: North American Actuarial Journal (May, 2007)
Author(s): Cox, Samuel H.;  Lin, Yijia
Researcher Information
Lin, Yijia
Lin, Yijia
N. Z. Snell Life Insurance Professor
CoB 425 V
P.O. Box 880490
University of Nebraska-Lincoln
Lincoln, NE 68588-0490, USA
Phone: (402) 472-0093
Fax: (402) 472-5140