Question 1. ABC insurance company is selling life annuity products in Hong Kong, which will pay the living benefits to the annuitants. Because residents in Hong Kong have the highest life expectancy in the world, ABC insurance company may be exposed to the longevity risk, i.e., large unexpected benefits paid due to the annuitants living beyond the life expectancy. ABC company decides to use some alternative risk transfer (ART) techniques to mitigate the negative effect caused by longevity risk to its capital.

3.1 Describe at least two ART techniques (i.e., parties involved, the risk, fund, premium, and claim flows among these parties) to mitigate this risk. (8 marks)

3.2 What would be the regulatory requirements for the proposed ART/reinsurance transactions imposed by the Hong Kong insurance regulator? (2 marks)

3.3 What are the costs and benefits in choosing a parametric trigger if ABC company decides to use a catastrophe bond to transfer its longevity risk? (4 marks)