Requirement: This assignment carries 10 marks. You shall complete this assignment individually and show all your work. You MUST upload your work in a Word document through Turnitin link posted on Moodle before the deadline (5 PM Friday, April 12, 2024).

Design a Risk Transfer Solution for Longevity Risk

Background: Hong Kong’s population is ageing faster than previously projected. Please read the following news and information regarding the ageing prediction.

Hong Kong going grey faster than expected, sparking fears over healthcare, calls for new retirement policies | South China Morning Post (scmp.com)

C&SD : Hong Kong population projections for 2022-2046 released (censtatd.gov.hk)

An ageing population imposes serious challenges due to longevity risk to individuals and Hong Kong society as a whole. Specifically, life insurance companies face enormous financial burdens related to the annuity business, which provides lifetime income to the annuitant. If the annuitant  lives (much) longer than life insurers previously expected (e.g., for an ageing society like Hong   Kong), there will be huge financial losses to the annuity business.

Similarly, medical insurance may suffer from the same problem. That is, the medical expenses for the aged population could explode if Hong Kong society continues to age in the future.

Consequently, the medical insurance premium could increase to anunaffordable level. Currently, the Hong Kong government introduced the Voluntary Health Insurance Scheme (VHIS) to help HongKong residents control healthcare expenditure. One important feature of VHIS is the transparent premium structure and broad coverage. Please refer to the following webpage for more information regarding VHIS.

Voluntary Health Insurance Scheme (vhis.gov.hk)

Catastrophe bond has been an effective risk transfer solution for the insurance and reinsurance industry to finance the most hazardous risks. Please read the following paper for an introduction to catastrophe bonds.

https://www.institutdesactuaires.com/global/gene/link.php?doc_id=871&fg=1

Assignment:

Assume XYZ insurance company plans to expand its medical insurance business in HongKong, possibly by offering the products qualified under VHIS. However, XYZ Insurance Company is concerned about little historical underwriting experience with medical insurance, especially for an ageing population in HongKong. XYZ insurance company would like to transfer the risk associated with unexpected risk in medical expenses to the capital market.