Key Q-Duration: A Framework for Hedging Longevity Risk

Johnny Siu-Hang Li and Ancheng Luo

ASTIN Bulletin, 2012, vol. 42, issue 2, 413-452

Abstract: When hedging longevity risk with standardized contracts, the hedger needs to calibrate the hedge carefully so that it can effectively reduce the risk. In this article, we present a calibration method that is based on matching mortality rate sensitivities. Specifically, we introduce a measure called key q-duration, which allows us to estimate the price sensitivity of a life-contingent liability to each portion of the underlying mortality curve. Given this measure, one can easily construct a longevity hedge with a small number of q-forward contracts. We further propose an extension for hedging the longevity risk associated with multiple birth cohorts, and another extension for accommodating population basis risk.

Date: 2012
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