Collective longevity swap: A novel longevity risk transfer solution and its economic pricing

An Chen, Hong Li () and Mark Schultze

Journal of Economic Behavior & Organization, 2022, vol. 201, issue C, 227-249

Abstract: To mitigate the hedger’s longevity risk exposure, this paper proposes a collective longevity swap between a reinsurer (hedge provider) and a group of hedgers (pension plans and annuity providers), and an economic framework to price longevity risk and longevity swaps. Combining the appealing features of two widely discussed longevity swaps, i.e., the indemnity swap and index-based swap, the collective longevity swap requires that reinsurer’s payments are based on the longevity risk of the aggregate portfolio of all hedgers, whereas each hedger could receive indemnity payments on their own portfolio. In a general principal-agent pricing model under the incomplete market setting, we determine the optimal risk premiums and hedge rates that maximize the reinsurer’s expected profit under a set of the hedgers’ participation constraints. We find that, in a competitive market, the proposed collective swap could lead to a higher expected profit for the reinsurer than the indemnity and the index-based swap, and simultaneously improve the benefits of the majority of hedgers without worsening the benefits of the rest. Finally, using a stochastic multi-population mortality model and real-world mortality data, a series of numerical analyses are performed to verify the theoretical findings.

Keywords: Collective longevity swap; Economic pricing; Principal-Agent-Model; Longevity risk transfer (search for similar items in EconPapers)
JEL-codes: G13 G22 J11 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:201:y:2022:i:c:p:227-249

DOI: 10.1016/j.jebo.2022.07.023

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