Longevity and disability risk analysis in enhanced life annuities

The paper focuses on the analysis of mortality and disability risk in enhanced life annuities. This cover increases a life annuity once the insured becomes Long Term Care (LTC) disabled. As lifetime duration and disability are affected by demographic trends, we use both mortality and morbidity projections, after evaluating a set of different projected scenarios using Italian national data on health and mortality. Risk analysis at portfolio level is carried out using risk reserve to quantify risk. Further, some Risk-Based Capital requirements are identified according to such a measure, considering different time horizons and confidence levels. The paper shows how the effect of demographic risk on Risk-Based Capital requirements could be reduced through either safety loading and, or capital allocation strategies. Finally the effect of reinsurance is also considered.