Market pricing of longevity-linked securities

Sixian Tang and Jackie Li

Scandinavian Actuarial Journal, 2021, vol. 2021, issue 5, 408-436

Abstract: One way of mitigating longevity risk is constructing a hedge using longevity- or mortality-linked securities. A fundamental question is how to price these securities in an incomplete life market where liabilities are not liquidly traded. Although various premium principles have been developed in the literature, no consensus has been reached on the best choice to price longevity risk. This study explores the impact of mortality model uncertainty and pricing rule uncertainty on the valuation of longevity-linked securities. Twelve premium principles based on risk-neutral and real-world measures are investigated under the Lee-Carter model and the generalised CBD model. Calibration constraints are set using the quotations of UK pension annuities to incorporate the market view of longevity risk. Different premium principles and model assumptions are tested and compared based on the estimated prices of S-forwards and longevity swaps with different maturities.

Date: 2021
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DOI: 10.1080/03461238.2020.1852105

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