Pricing and hedging of longevity basis risk through securitisation

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

No 2023033, LIDAM Reprints ISBA from Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA)

Abstract: Pension funds and insurers face difficulties in hedging their longevity risk, which is the uncertainty of how long their clients will live. A possible solution could be using longevity-linked securities to transfer some of this risk to other parties. However, these securities may not match the actual mortality rates of the insurer’s clients, resulting in a potential loss due to basis risk. In this paper, we measure this basis risk through the pricing of a longevity derivative under Solvency II. We also compare this method with other common pricing methods in finance. We explore and evaluate different hedging strategies for insurers, using a multi-population model derived from a two-dimensional Hull and White model that captures the dynamics of mortality over time.

Keywords: Longevity basis risk; longevity-linked securities; Cost of Capital; basis risk; Solvency Capital Requirement; multi-population mortality model (search for similar items in EconPapers)
Pages: 32
Date: 2023-12-27
Note: In: ASTIN Bulletin, 2024, vol. 54(1), p. 159-184
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Persistent link: https://EconPapers.repec.org/RePEc:aiz:louvar:2023033

DOI: 10.1017/asb.2023.37

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