Financial Products Innovation Research Based On Longevity Risk

Aging has become an irreversible trend around the world, and has significant influence on economic and social. The basic social security have not been perfect, and the longevity risk causes large pressure for the pension funds reserve. Either for the need of macro economic development, or for the micro agents' financial freedom demand, developing commercial old-age security will be a feasible way to alleviate the pressure of the social endowment. Form the perspective of aging finance, we design innovative aging finance product, which is an supplement of the basic old-age security, and improve the indivial's endowment financial arrangement.Aging finance is a financial sevice industry with great potential, which is committed to research and design endowment products for elderly group. Endowment leads to finance, and finance changes endowment.Relying on government, enterprises and financial institutions, aging finance includes macro endowment security system and micro financial products design for the elderly. There is an self-strengthen theoretical logic between finance and endowment in both macro and micro aspects. From macro perspective, preservation and appreciation of pensions (including individual accounts of basic pension, social security fund, and corporate pension) needs investment in the stable financial market by the means of long-time financial instruments. Meanwhile, pension's large investment in capital market will improve the trading mechanism, product design, policies and regulation of the market. From micro perspective, wealth management of the elderly desires special financial products, such as reverse mortgage, longevity bonds and life annuities, etc.. which also promote financial innovation.Our research is expanded from the micro perspective, and this paper is committed to design an innovative financial product for individuals, which not only can manage retirement savings for individuals on different ages, but also can cover the longevity risk to the largest extend at a relative low price. Among the whole life cycle, diverseness of wealth claim and risk preferences result in differences of assets allocation. We put elderly demand into the life cycle investment model in order to find the optimal arrangement through the whole life.We focus on three aspects in this paper:measuring the longevity risk, designing the innovative aging finance products, and optimizing the investment-consumption portfolio.Longevity risk measurement under stochastic life spar. Longevity risk is the risk that the elderly can not manage their wealth to meet consumption. Under the assumption of the stochastic life expectency and random yield of financial assets, we use the necessary wealth growth rate as a measure of the retirees'longevity risk. The necessary wealth growth rate is a lowest wealth growth rate that, in the given process of personal wealth and under the given confidence level (95%), during the given time period (before death moment), makes the personal wealth keep positive.Using stochastic mortality model and personal wealth process, we deduce retirees' shortfall probability, and then use the numerical algorithm to calculate the necessary wealth growth rate when the shortfall probability is lower than 5%. In addition, we divide the elderly into three groups:the basic group, the bequest group, and the lonely group, and compare their longevity risk characteristics. The bequest face lower longevity risk than the basic, and the lonely encounter the highest risk and earliest peak appearance. Economic parameters have non-ignorable impacts on longevity risk, both the CPI and government bond's volatility have positive correlation with longevity risk, and the former's aggravation is convergent while the latter's aggravation is divergent.Designing and Evaluating the Longevity-Indexed Deferred Annuity. This paper relieves the contradiction between life annuity demand and supply by innovating a financial product for the elderly——Longevity-Indexed Deferred Annuity (LIDA) not only transfers the systematic longevity-risk that faced by the annuity provider, but also covers the buyer's longevity risk at a lower price. The paper evaluates LIDA in two dimensions:first, the dimension of longevity-risk transfer, we price the LIDA and meanwhile quantify the transferring degree; second, the dimension of longevity-risk coverage, we calculate the annuity equivalent wealth of LIDA using numerical algorithm of dynamic optimize in discrete-time, then obtain the coverage rate. The empirical findings show that, LIDA can cover at least 80% of the longevity risk at lower costs. LIDA offers the provider an effective management of longevity-risk, while meeting the buyer's demands of liquidity and bequest.Portfolio expansion of the aging financial innovative product——the optimal assets allocation in life cycle. This paper conducts a stochastic life cycle investment model considering labor income and mortality, with in which we analyze how the individuals allocate their assets on stocks, bonds, and life annuities to attain maximum utility, and then we compare the allocation differences among the three groups. The empirical analysis shows that, diverseness of retirement savings and consumption concept determines the differences of annuity purchasing and assets allocation among the three groups. The basic group starts purchasing life annuity at 37 years old, and their investment behavior relatively conservative after retirement. By contrast, the bequest group purchase fewer annuities, and after retirement the proportion of bond maintain rising until death. The lonely group allocate the most annuities and invest most conservatively after retirement, they sell out all financial assets before the peak of longevity risk. In addition, LIDA series not only offer basic security products such as LID As starting paying at 60, and also offer risk peak covering products starting paying at high ages. Both of the products provide obvious well fare for individuals, and especially when extend the limitation of purchasing age, LIDAs starting paying at high ages elevate more utility for individuals.Through the research of longevity risk and aging financial products, we realize that we should comprehensively identify and dynamic measure longevity risk, and focus on designing multi-layered aging financial products including bank products, insurance products, and fund products, which can help individuals arrange their aging life in the whole life cycle.