longevityrisk

Longevity risk refers to the financial risk that individuals or entities may outlive their financial resources. This means a person might live longer than expected, depleting their savings and potentially facing financial hardship in their later years. For insurance companies and pension funds, longevity risk manifests as the possibility that policyholders or beneficiaries live longer than actuarially projected, leading to higher payouts than anticipated.

Several factors contribute to longevity risk. Advances in healthcare, improved living standards, and declining mortality rates are positive developments for individuals but increase the likelihood of longer lifespans. This can strain retirement income sources such as pensions, annuities, and personal savings. For institutions, inaccurate mortality assumptions can lead to significant financial miscalculations, potentially impacting their solvency.

Strategies to mitigate longevity risk include careful financial planning, diversifying income streams in retirement, and considering products like annuities that can provide a guaranteed income for life. For institutions, sophisticated actuarial modeling, risk pooling, and the purchase of reinsurance are common approaches to manage this exposure. Understanding and addressing longevity risk is crucial for both individual financial security and the stability of financial institutions.