How Do Insurance Companies Hedge Annuities?

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October 8, 2014

David Pipes

Annuities are written by life insurance companies. Life insurance companies also issue life insurance policies. When people live a long time, death claims are delayed and the company continues to get premiums. If those same people also have an annuity, the extension of the death claim helps finance the annuity. Since there is rarely a one to one example like this, you know that in a group of 100 people age 65, someone is likely to die in the first year while four or five will make it to 100. The money paid for the short benefit offsets the expense of the longer benefit. This is all actuarial science.

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