Pricing and hedging of longevity basis risk through securitization

Fadoua Zeddouk and Pierre Devolder
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Fadoua Zeddouk: Université catholique de Louvain, LIDAM/ISBA, Belgium
Pierre Devolder: Université catholique de Louvain, LIDAM/ISBA, Belgium

No 2022038, LIDAM Discussion Papers ISBA from Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA)

Abstract: Hedging the basis risk is a challenging issue for pension funds and insurers, who can be interested in longevity-linked securities to transfer their longevity risk. These derivatives are based on a given population data rather than their own policy data, which may lead to a potential loss due to data mismatch. In this paper we propose a pricing approach under Solvency II to evaluate the longevity basis risk through securitization, by associating this risk to the payo􏰀 of a longevity derivative. This method is then compared to other classical pricing methods used in finance. We assess and analyze di􏰀erent hedging strategies for 􏰁rms facing basis risk, using a multipopulation model based on a two-dimensional Hull and White model to represent the evolution of mortality over time.

Keywords: Stochastic longevity risk; longevity-linked securities; Cost of Capital; basis risk; Solvency Capital Requirement; multi-population mortality model (search for similar items in EconPapers)
Pages: 33
Date: 2022-12-13
New Economics Papers: this item is included in nep-age and nep-rmg
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