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Pricing and hedging of longevity basis risk through securitisation

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  • Zeddouk, Fadoua
  • Devolder, Pierre

Abstract

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.

Suggested Citation

  • Zeddouk, Fadoua & Devolder, Pierre, 2024. "Pricing and hedging of longevity basis risk through securitisation," ASTIN Bulletin, Cambridge University Press, vol. 54(1), pages 159-184, January.
  • Handle: RePEc:cup:astinb:v:54:y:2024:i:1:p:159-184_7
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