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Longevity hedge effectiveness using socioeconomic indices

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  • Kallestrup-Lamb, Malene
  • Søgaard Laursen, Nicolai

Abstract

This paper evaluates socioeconomic basis risk in longevity hedging. Using data for a full population stratified into socioeconomic groups, we explore the benefits and costs of two alternative hedging strategies, with and without basis risk, in the capital market. The benefit of the longevity hedge is represented by the risk reduction in the variability of a life annuity, whereas the cost is the notional amount of hedging contracts times the actuarial risk premium. We find that hedging is more cost-effective for the annuity provider when basis risk is eliminated. Moreover, it allows for a higher degree of hedge effectiveness at a cost that is equivalent to a hedge where basis risk is present. Finally, the yearly expenses related to hedging longevity risk require, at most, an extra added rate of return of no more than 0.16%.

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  • Kallestrup-Lamb, Malene & Søgaard Laursen, Nicolai, 2024. "Longevity hedge effectiveness using socioeconomic indices," Insurance: Mathematics and Economics, Elsevier, vol. 114(C), pages 242-251.
    • Handle: RePEc:eee:insuma:v:114:y:2024:i:c:p:242-251
    DOI: 10.1016/j.insmatheco.2023.11.008
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    More about this item

    Keywords

    Longevity risk; Hedge effectiveness; Basis risk; Socioeconomic groups; Static hedging; Q-forwards;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • I14 - Health, Education, and Welfare - - Health - - - Health and Inequality

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