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Longevity risk, cost of capital and hedging for life insurers under Solvency II

Team collaboration

Ramona Meyricke and Michael Sherris

The cost of capital is an important factor determining the premiums charged by life insurers issuing life annuities. Insurers will be able to offer more finely priced annuities if they can reduce this cost whilst maintaining solvency. This capital cost can be reduced by hedging longevity risk with longevity swaps, a form of reinsurance. We assess the costs of longevity risk management using longevity swaps compared to costs of holding capital under Solvency II.

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