The cost of counterparty risk and collateralization in longevity swaps

Enrico Biffis, David Blake, Lorenzo Pitotti and Ariel Sun

MPRA Paper from University Library of Munich, Germany

Abstract: Derivative longevity risk solutions, such as bespoke and indexed longevity swaps, allow pension schemes and annuity providers to swap out longevity risk, but introduce counterparty credit risk, which can be mitigated if not fully eliminated by collateralization. We examine the impact of bilateral default risk and collateral rules on the marking to market of longevity swaps, and show how longevity swap rates must be determined endogenously from the collateral flows associated with the marking-to-market procedure. For typical interest rate and mortality parameters, we find that the impact of collateralization is modest in the presence of symmetric default risk, but more pronounced when default risk and/or collateral rules are asymmetric. Our results suggest that the overall cost of collateralization is comparable with, and often much smaller than, that found in the interest-rate swaps market (as a result of the offsetting effects of interest rate and longevity risks), which may then provide the appropriate reference framework for the credit enhancement of both indemnity-based and indexed longevity risk solutions.

Keywords: longevity swap; counterparty risk; default risk; collateral; marking-to-market (search for similar items in EconPapers)
JEL-codes: G23 (search for similar items in EconPapers)
Date: 2011-06-20
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/35740/1/MPRA_paper_35740.pdf original version (application/pdf)

Related works:
Journal Article: The Cost of Counterparty Risk and Collateralization in Longevity Swaps (2016)
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:pra:mprapa:35740

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().