The Impact of Collateralization on Longevity Swap Transactions

Selin Özen () and Şule Şahin ()
Additional contact information
Selin Özen: Ankara University
Şule Şahin: University of Liverpool

A chapter in Mathematical and Statistical Methods for Actuarial Sciences and Finance, 2022, pp 365-370 from Springer

Abstract: Abstract Index-based longevity swaps provide many advantages over the other hedging instruments to life insurance companies and pension plans. Insurers and pension plan providers can transfer their longevity exposures to the capital markets at lower costs by using these securities. Hence, significant growth has been seen in longevity swap transactions in the longevity-linked securities and derivatives markets since 2008. However, since longevity-linked instruments are traded OTC, each involved party is exposed to the counterparty default risk. Therefore, regulators have emphasised the role of credit risk mitigation tools such as collateralization for the improvement of swap contracts’ credit quality. In this paper, our aim is to construct a hedging strategy for longevity risk by using collateral. As the first step, the Lee-Carter with renewal process and exponential jumps model proposed by Özen and Şahin [7] and the Lee-Carter model without jumps are used to project the future mortality rates and to price the index-based longevity swaps. Additionally, re-hypothecation is allowed for the parties of the swap to increase the benefits of the collateralization. As a result, for both mortality models, insurers and pension plan providers obtain more effective risk reduction levels with the inclusion of the collateral. However, the Lee-Carter model with renewal process and exponential jump model provides more risk reduction.

Keywords: Longevity risk; Collateral; Hedging strategy; Longevity swaps (search for similar items in EconPapers)
Date: 2022
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

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:spr:sprchp:978-3-030-99638-3_59

Ordering information: This item can be ordered from
http://www.springer.com/9783030996383

DOI: 10.1007/978-3-030-99638-3_59

Access Statistics for this chapter

More chapters in Springer Books from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().