Modelling and management of longevity risk: Approximations to survivor functions and dynamic hedging

Andrew J.G. Cairns

Insurance: Mathematics and Economics, 2011, vol. 49, issue 3, 438-453

Abstract: This paper looks at the development of dynamic hedging strategies for typical pension plan liabilities using longevity-linked hedging instruments. Progress in this area has been hindered by the lack of closed-form formulae for the valuation of mortality-linked liabilities and assets, and the consequent requirement for simulations within simulations. We propose the use of the probit function along with a Taylor expansion to approximate longevity-contingent values. This makes it possible to develop and implement computationally efficient, discrete-time delta hedging strategies using q-forwards as hedging instruments.

Keywords: Longevity risk; Dynamic hedging; Delta hedging; Probit-Taylor approximation; CBD model; q-forward; Solvency II (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (19)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:49:y:2011:i:3:p:438-453

DOI: 10.1016/j.insmatheco.2011.06.004

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