Securitizing and tranching longevity exposures

Enrico Biffis and David Blake

Insurance: Mathematics and Economics, 2010, vol. 46, issue 1, 186-197

Abstract: We consider the problem of optimally designing longevity risk transfers under asymmetric information. We focus on holders of longevity exposures that have superior knowledge of the underlying demographic risks, but are willing to take them off their balance sheets because of capital requirements. In equilibrium, they transfer longevity risk to uninformed agents at a cost, where the cost is represented by retention of part of the exposure and/or by a risk premium. We use a signalling model to quantify the effects of asymmetric information and emphasize how they compound with parameter uncertainty. We show how the cost of private information can be minimized by suitably tranching securitized cashflows, or, equivalently, by securitizing the exposure in exchange for an option on mortality rates. We also investigate the benefits of pooling several longevity exposures and the impact on tranching levels.

Keywords: Longevity; risk; Asymmetric; information; Security; design; Pooling; Tranching (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0167-6687(09)00068-7
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:46:y:2010:i:1:p:186-197

Access Statistics for this article

Insurance: Mathematics and Economics is currently edited by R. Kaas, Hansjoerg Albrecher, M. J. Goovaerts and E. S. W. Shiu

More articles in Insurance: Mathematics and Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().