Uncertainty in Pricing and Risk Measurement of Survivor Contracts

Kenrick Raymond So, Stephanie Claire Cruz, Elias Antonio Marcella, Jeric Briones () and Len Patrick Dominic Garces
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Kenrick Raymond So: Department of Mathematics, Ateneo de Manila University, Quezon City 1108, Philippines
Stephanie Claire Cruz: Department of Mathematics, Ateneo de Manila University, Quezon City 1108, Philippines
Elias Antonio Marcella: Department of Mathematics, Ateneo de Manila University, Quezon City 1108, Philippines
Jeric Briones: Department of Mathematics, Ateneo de Manila University, Quezon City 1108, Philippines
Len Patrick Dominic Garces: Department of Mathematics, Ateneo de Manila University, Quezon City 1108, Philippines

Risks, 2025, vol. 13, issue 2, 1-26

Abstract: As life expectancy increases, pension plans face growing longevity risk. Standardized longevity-linked securities such as survivor contracts allow pension plans to transfer this risk to capital markets. However, more consensus is needed on the appropriate mortality model and premium principle to price these contracts. This paper investigates the impact of the mortality model and premium principle choice on the pricing, risk measurement, and modeling of survivor contracts. We present a framework for evaluating risk measures associated with survivor contracts, specifically survivor forwards (S-forward) and survivor swaps (S-swaps). We analyze how the mortality model and premium principle assumptions affect pricing and risk measures (value-at-risk and expected shortfall). Four mortality models (Lee–Carter, Renshaw–Haberman, Cairns–Blake–Dowd, and M6) and eight premium principles (Wang, proportional hazard, dual power, Gini, exponential, standard deviation, variance, and median absolute deviation) are considered. Our analysis highlights the need to refine mortality models and premium principles to enhance pricing accuracy and risk management. We also suggest regulators and practitioners incorporate expected shortfall alongside value-at-risk to capture tail risks and improve capital allocation.

Keywords: longevity risk; risk measurement; survivor swaps; Solvency II; asset pricing (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2025
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