Longevity risk and survivor derivative pricing

Paul Dawson, Hai Lin and Yangshu Liu

Journal of Risk Finance, 2013, vol. 14, issue 2, 140-158

Abstract: Purpose - Longevity risk, that is, the uncertainty of the demographic survival rate, is an important risk for insurance companies and pension funds, which have large, and long‐term, exposures to survivorship. The purpose of this paper is to propose a new model to describe this demographic survival risk. Design/methodology/approach - The model proposed in this paper satisfies all the desired properties of a survival rate and has an explicit distribution for both single years and accumulative years. Findings - The results show that it is important to consider the expected shift and risk premium of life table uncertainty and the stochastic behaviour of survival rates when pricing the survivor derivatives. Originality/value - This model can be applied to the rapidly growing market for survivor derivatives.

Keywords: Insurance companies; Life insurance; Risk finance; Modelling; Survival rate; Survivor derivatives; Gamma distribution (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jrfpps:15265941311301189

DOI: 10.1108/15265941311301189

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