Pricing and hedging of longevity basis risk through securitisation

Pension funds and insurers face difficulties in hedging their longevity risk, which is the uncertainty of how long their clients will live. A possible solution could be using longevity-linked securities to transfer some of this risk to other parties. However, these securities may not match the actua...

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Bibliographic Details
Published in:ASTIN Bulletin : The Journal of the IAA 2024-01, Vol.54 (1), p.159-184
Main Authors: Zeddouk, Fadoua, Devolder, Pierre
Format: Article
Language:English
Subjects:
Actuarial science
Brownian motion
Financial instruments
Hedging
Mortality
Pension funds
Population
Random variables
Solvency
Valuation
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Summary:Pension funds and insurers face difficulties in hedging their longevity risk, which is the uncertainty of how long their clients will live. A possible solution could be using longevity-linked securities to transfer some of this risk to other parties. However, these securities may not match the actual mortality rates of the insurer’s clients, resulting in a potential loss due to basis risk. In this paper, we measure this basis risk through the pricing of a longevity derivative under Solvency II. We also compare this method with other common pricing methods in finance. We explore and evaluate different hedging strategies for insurers, using a multi-population model derived from a two-dimensional Hull and White model that captures the dynamics of mortality over time.
ISSN:0515-0361
1783-1350
DOI:10.1017/asb.2023.37