Annuity Risk Model

The use of stochastic asset and liability models has become routine for larger insurance companies to value, manage and assess capital and price guarantees. These techniques are also now being used to understand and manage the risks in detail in a number of specific areas within an insurer's business, including the annuity book.

With the ageing of the population, the demand for, and sophistication of, annuity- type products is likely to continue to grow. This in turn requires sophisticated modelling to understand the economic risk being run by insurance companies on their annuity products.

The Barrie & Hibbert Annuity Risk Model is designed to give insurers an in-depth understanding of their annuity book and the management strategies that they can implement to enhance the economic value of the book.

This chart shows an example of the breakdown of risk capital calculated using the model. Modelling risk factors separately and in combination illustrates that in the modelled example the diversification between longevity risk capital and credit risk capital is greater than might be expected from full independence.

This is because of the interaction of both risk factors with interest rate risk – longevity improvements have the largest effect on capital when interest rates are low due to the need to provide additional future annuity payments when rates are low, conversely the worst credit events tend to happen when interest rates are high.

To find out more about Barrie & Hibbert's Annuity Risk Model, please contact Colin Wilson at This e-mail address is being protected from spambots, you need JavaScript enabled to view it   or Sathish Ramdayal at This e-mail address is being protected from spambots, you need JavaScript enabled to view it