Socioeconomic differentials in mortality: implications on index-based longevity hedges

Pintao Lyu, Johnny Siu-Hang Li and Kenneth Q. Zhou

Scandinavian Actuarial Journal, 2023, vol. 2023, issue 4, 359-387

Abstract: In this paper, we address the mortality modeling needs for pension plan sponsors who wish to use index-based solutions to mitigate their longevity risk exposures. Specifically, we propose the three-way Li-Lee (TWLL) model, which enforces a certain extent of coherence between the population to which the index-based hedging instrument is linked and the population of pension plan members, and at the same time incorporates the empirical fact that mortality improvement rates of different socioeconomic subgroups in the pension plan are persistently different. We further develop a delta longevity hedging strategy that is compatible with the TWLL model. With the aid of real mortality data, we demonstrate that if persistent socioeconomic differentials in mortality improvement rates exist but are not considered in an index-based longevity hedge, the performance of the hedge could be compromised, and the extent of underperformance would depend on the distributions of pension plan members and pension amounts across different socioeconomic subgroups. This problem can be alleviated if the longevity hedge is calibrated on the basis of the TWLL model.

Date: 2023
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://hdl.handle.net/10.1080/03461238.2022.2104131 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:sactxx:v:2023:y:2023:i:4:p:359-387

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/sact20

DOI: 10.1080/03461238.2022.2104131

Access Statistics for this article

Scandinavian Actuarial Journal is currently edited by Boualem Djehiche

More articles in Scandinavian Actuarial Journal from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().