retirement wallet and risk-sharing annuities

Bravo, J. M. (2019). Funding for longer lives: retirement wallet and risk-sharing annuities. Ekonomiaz. Basque Economic Review, 96(2), 268-291.Longevity increases and population ageing create challenges for all societal institutions, particularly those providing retirement income, health care, and long-term care services. At the individual level, an obvious question is how to ensure all retirees have an adequate, secure, stable and predictable lifelong income stream that will allow them to maintain a target standard of living for however long the individual lives. In this paper we introduce and discuss the concept of retirement wallet representing the multiple income and service sources individuals and their families will have to fund for longer lives. We then address the main decumulation risks and options, including the adoption of a given longevity insurance strategy, of a programmed withdrawal strategy and of an investment strategy. The main payout options available for allocating assets accumulated in pension plans are discussed, particularly the role of traditional and innovative investment and longevity risk-sharing structures. We provide illustrative results for the price of innovative participating longevity-linked life annuities (PLLAs) that link benefits to the dynamics of both a longevity index and an interest rate adjustment factor using Spanish mortality and financial market data.publishersversionpublishe

Pricing Survivor Bonds with Affine-Jump Diffusion Stochastic Mortality Models

Bravo, J. M. (2021). Pricing Survivor Bonds with Affine-Jump Diffusion Stochastic Mortality Models. In 2021 The 5th International Conference on E-Commerce, E-Business and E-Government ICEEG '21, April 28-30, 2021, Rome, Italy. Association for Computing Machinery (ACM). https://doi.org/10.1145/3466029.3466037 ---------------------------------------------------------------- Funding Information: The author acknowledges financial support by Portuguese national funds through FCT under the project UIDB/04152/2020 - Centro de Investigação em Gestão de Informação (MagIC). Publisher Copyright: © 2021 Association for Computing Machinery. All rights reserved.Capital-market-based solutions are an interesting alternative to reinsurance-based options for managing systemic longevity risk in pension funds, insurance companies and annuity providers. The pricing of longevity-linked securities depends both on the stochastic process for the underlying risk factors (age-specific mortality rates, interest rate) and on investor's risk attitude. This paper proposes a pricing approach for survivor bonds using affine-jump diffusion stochastic mortality models. The model structure uses a non-mean reverting square-root jump diffusion Feller process combined with a Poisson process with double asymmetric exponentially distributed jumps to account for both negative and positive jumps. The model offers analytical tractability, fits well data and allows for closed-form expressions for the survival probability. Illustrative empirical results on the pricing of survivor bonds are provided using U. S. mortality data for representative cohorts. The results suggest the cost of hedging longevity risk by issuing survivor bonds would be acceptable for the issuer.authorsversionpublishe

Ensemble methods for Stock Market Prediction

Bravo, J. M. V. (2023). Ensemble methods for Stock Market Prediction. Paper presented at The 8th Workshop on MIning DAta for financial applications, Turin, Italy.otherunpublishe

Addressing the Pension Decumulation Phase of Employee Retirement Planning

Longevity increases and population ageing create challenges for all societal institutions, particularly those providing retirement income, healthcare, and long-term care services. At the individual level, an obvious question is how to ensure all retirees have an adequate, secure, stable, and predictable lifelong income stream that will allow them to maintain a target standard of living for, however, long the individual lives. In this chapter, we review and discuss the main pension decumulation options by explicitly modelling consumers’ behaviour and objectives though an objective function based on utility theory accounting for consumption and bequest motives and different risk preferences. Using a Monte-Carlo simulation approach calibrated to US financial market and mortality data, our results suggest that purchasing a capped participating longevity-linked life annuity at retirement including embedded longevity and financial options that allow the annuity provider to periodically revise annuity payments if observed survivorship and portfolio outcomes deviate from expected (or guaranteed) values at contract initiation deliver superior welfare results when compared with classical annuitization and non-annuitization decumulation strategies

Short-Term Regional Demographic Forecasts with Time Series Methods and Machine Learning Algorithms

Bravo, J. M., & Coelho, E. (2020). Short-Term Regional Demographic Forecasts with Time Series Methods and Machine Learning Algorithms. Boletim da Sociedade Portuguesa de Estatística, (Primavera 2020), 20-29.publishersversionpublishe

A multi‐state approach to modelling intermediate events and multiple mortgage loan outcomes

Chamboko, R., & Bravo, J. M. (2020). A multi‐state approach to modelling intermediate events and multiple mortgage loan outcomes. Risks, 8(2), 1-29. [64]. https://doi.org/10.3390/risks8020064This paper proposes a novel system‐wide multi‐state framework to model state occupations and the transitions among current, delinquency, default, prepayment, repurchase, short sale and foreclosure on mortgage loans. The approach allows for the modelling of the progression of borrowers from one state to another to fully understand the risks of a cohort of borrowers over time. We use a multi‐state Markov model to model the transitions to and from various states. The key factors affecting the transition into various loan outcomes are the ability to pay as measured by debt‐to‐income ratio, equity as marked by loan‐to‐value ratio, interest rates and the property type. Our findings have broader policy implications for better decision‐making on granting loans and the design of debt relief and mortgage modification policies.publishersversionpublishe

Linking pensions to life expectancy: tackling conceptual uncertainty through Bayesian Model Averaging

Linking pensions to longevity developments at retirement age has been one of the most common policy responses of pension schemes to aging populations. The introduction of automatic stabilizers is primarily motivated by cost containment objectives, but there are other dimensions of welfare restructuring in the politics of pension reforms, including recalibration, rationalization, and blame avoidance for unpopular policies that involve retrenchments. This paper examines the policy designs and implications of linking entry pensions to life expectancy developments through sustainability factors or life expectancy coefficients in Finland, Portugal, and Spain. To address conceptual and specification uncertainty in policymaking, we propose and apply a Bayesian model averaging approach to stochastic mortality modeling and life expectancy computation. The results show that: (i) sustainability factors will generate substantial pension entitlement reductions in the three countries analyzed; (ii) the magnitude of the pension losses depends on the factor design; (iii) to offset pension cuts and safeguard pension adequacy, individuals will have to prolong their working lives significantly; (iv) factor designs considering cohort longevity markers would have generated higher pension cuts in countries with increasing life expectancy gap

Hedging the unhedgeable

Bravo, J. M., & Díaz-Giménez, J. (2014). Is longevity an insurable risk? Hedging the unhedgeable. (pp. 1). (Papers Mi Jubilación; No. 9). Instituto BBVA de Pensiones.In the 18th century, Benjamin Franklin said that "Nothing is certain but death and taxes". The 21st-century adaptation of this famous expression could be "nothing is certain but longevity and taxes." Longevity risk is a critical risk for institutions that provide life-long payments such as pension funds, annuity providers and public pension schemes. The amount of unfunded liabilities institutions face will be massive if their beneficiaries live considerably longer than expected. This paper addresses the problem of longevity risk and discusses the ways in which individuals, life assurers, annuity providers and pension plans can manage their exposure to this risk. We discuss whether the traditional insurance mechanism, involving risk transfer and pooling, can deal appropriately with longevity risk. We then review longevity risk management solutions, comprising both traditional insurance and reinsurance techniques and recently developed capital market instruments.publishersversionpublishe

Em defesa de um sistema de pensões sustentável e intergeracionalmente justo para Portugal

Bravo, J. M. (2021). Em defesa de um sistema de pensões sustentável e intergeracionalmente justo para Portugal. Cadernos de Economia, (136), 38-43. https://cadernoseconomia.com.pt/wp-content/uploads/2021/09/cadernos-economia-136-preview.pdfauthorsversionpublishe

Getting life expectancy estimates right for pension policy: period versus cohort approach

In many policy areas it is essential to use the best estimates of life expectancy, but it is vital to most areas of pension policy. This paper presents the conceptual differences between static period and dynamic cohort mortality tables, estimates the differences in life expectancy for Portugal and Spain, and compares official estimates of both life expectancy estimates for Australia, the United Kingdom, and the United States for 1981, 2010, and 2060. These comparisons reveal major differences between period and cohort life expectancy in and between countries and across years. The implications of using wrong estimates for pension policy, including financial sustainability, are explore