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Securitization, structuring and pricing of longevity risk

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  • Wills, Samuel
  • Sherris, Michael

Abstract

Pricing and risk management for longevity risk have increasingly become major challenges for life insurers and pension funds around the world. Risk transfer to financial markets, with their major capacity for efficient risk pooling, is an area of significant development for a successful longevity product market. The structuring and pricing of longevity risk using modern securitization methods, common in financial markets, have yet to be successfully implemented for longevity risk management. There are many issues that remain unresolved for ensuring the successful development of a longevity risk market. This paper considers the securitization of longevity risk focusing on the structuring and pricing of a longevity bond using techniques developed for the financial markets, particularly for mortgages and credit risk. A model based on Australian mortality data and calibrated to insurance risk linked market data is used to assess the structure and market consistent pricing of a longevity bond. Age dependence in the securitized risks is shown to be a critical factor in structuring and pricing longevity linked securitizations.

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Bibliographic Info

Article provided by Elsevier in its journal Insurance: Mathematics and Economics.

Volume (Year): 46 (2010)
Issue (Month): 1 (February)
Pages: 173-185

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Handle: RePEc:eee:insuma:v:46:y:2010:i:1:p:173-185

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Web page: http://www.elsevier.com/locate/inca/505554

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Keywords: Longevity risk Securitization;

References

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  1. Kevin Dowd, 2003. "Survivor Bonds: A Comment on Blake and Burrows," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 70(2), pages 339-348.
  2. Ballotta, Laura & Haberman, Steven, 2006. "The fair valuation problem of guaranteed annuity options: The stochastic mortality environment case," Insurance: Mathematics and Economics, Elsevier, vol. 38(1), pages 195-214, February.
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  6. Dahl, Mikkel, 2004. "Stochastic mortality in life insurance: market reserves and mortality-linked insurance contracts," Insurance: Mathematics and Economics, Elsevier, vol. 35(1), pages 113-136, August.
  7. Yijia Lin & Samuel H. Cox, 2005. "Securitization of Mortality Risks in Life Annuities," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 72(2), pages 227-252.
  8. David Blake & Andrew Cairns & Kevin Dowd & Richard MacMinn, 2006. "Longevity Bonds: Financial Engineering, Valuation, and Hedging," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(4), pages 647-672.
  9. Alex Cowley & J. David Cummins, 2005. "Securitization of Life Insurance Assets and Liabilities," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 72(2), pages 193-226.
  10. Adam Creighton & Henry Hongbo Jin & John Piggott & Emiliano A. Valdez, 2005. "Longevity Insurance: A Missing Market," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 50(sp), pages 417-435.
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Citations

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Cited by:
  1. Blake, David & Courbage, Christophe & MacMinn, Richard & Sherris, Michael, 2011. "Longevity risks and capital markets: The 2010-2011 update," MPRA Paper 34279, University Library of Munich, Germany.
  2. Andrew J.G. Cairns & Kevin Dowd & David Blake & Guy D. Coughlan, 2014. "Longevity hedge effectiveness: a decomposition," Quantitative Finance, Taylor & Francis Journals, vol. 14(2), pages 217-235, February.
  3. Katja Hanewald & John Piggott & Michael Sherris, 2011. "Individual Post-Retirement Longevity Risk Management Under Systematic Mortality Risk," Working Papers 201113, ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales.
  4. Meyricke, Ramona & Sherris, Michael, 2014. "Longevity risk, cost of capital and hedging for life insurers under Solvency II," Insurance: Mathematics and Economics, Elsevier, vol. 55(C), pages 147-155.
  5. Huang, Huaxiong & Milevsky, Moshe A. & Salisbury, Thomas S., 2012. "Optimal retirement consumption with a stochastic force of mortality," Insurance: Mathematics and Economics, Elsevier, vol. 51(2), pages 282-291.
  6. Ngai, Andrew & Sherris, Michael, 2011. "Longevity risk management for life and variable annuities: The effectiveness of static hedging using longevity bonds and derivatives," Insurance: Mathematics and Economics, Elsevier, vol. 49(1), pages 100-114, July.
  7. Huang, Yu-Lieh & Tsai, Jeffrey Tzuhao & Yang, Sharon S. & Cheng, Hung-Wen, 2014. "Price bounds of mortality-linked security in incomplete insurance market," Insurance: Mathematics and Economics, Elsevier, vol. 55(C), pages 30-39.
  8. Huaxiong Huang & Moshe A. Milevsky & Thomas S. Salisbury, 2012. "Optimal retirement consumption with a stochastic force of mortality," Papers 1205.2295, arXiv.org.
  9. Maathumai Nirmalendran & Michael Sherris & Katja Hanewald, 2012. "Solvency Capital, Pricing and Capitalization Strategies of Life Annuity Providers," Working Papers 201213, ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales.
  10. Blake, David & Brockett, Patrick & Cox, Samuel & MacMinn, Richard, 2011. "Longevity risk and capital markets: The 2009-2010 update," MPRA Paper 28868, University Library of Munich, Germany.

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