T7: Liquidity and Longevity Risk Management of Households and Life Insurance Companies in an Aging Society

Project Start:01/2016
Status:Completed
Researchers:Yangming Bao, Jens Gal, Irina Gemmo, Helmut Gründl, Martin Götz, Brigitte Haar, Vanya Horneff, Holger Kraft, Raimond Maurer
Category: Financial Intermediation, Household Finance, Financial Markets
Funded by:LOEWE

The purpose of our team project is twofold: first, we want to examine how demographic changes affect the ability of households to manage liquidity and longevity risk. Second, we explore what role life insurance companies can play in contributing to the risk management of these risks for households. The ability to manage these risks is important for households to determine an optimal consumption pattern over their life cycle. While existing research finds that exposure to specific shocks as well as asset prices change when societies age, it has not been studied what role financial intermediaries can play in addressing these issues. Since the design of policies to address specific needs that arise from demographic change depends on the understanding of how demographic change affects households, we first examine how a household’s management of longevity and liquidity risk changes in an aging society (subproject A). Following this, we explore how changes in households’ demand for life insurance are related to the investment behavior of insurance companies (subproject B). To capture feedback effects from insurance companies’ investment behavior on households we combine and extend our work to construct a general equilibrium model (subproject C), which we calibrate empirically. This allows us to evaluate the welfare effects of different regulatory policies regarding the optimal design of insurance products and markets. To analyze whether these policies are legally feasible, we study the current legal framework and situation as well (subproject D). Because investment in real estate provides another way of households to manage their exposure to risk, we explore how households’ investment in housing and the bequeathing of real estate across generations changes due to demographic change (subproject E). Our team project provides a holistic approach to study how demographic change affects household welfare and how financial intermediaries, specifically insurance companies, are able to address some of the challenges stemming from demographic change.

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