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A feasible natural hedging strategy for insurance companies

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  • Wang, Chou-Wen
  • Huang, Hong-Chih
  • Hong, De-Chuan
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    Abstract

    To offer a means for insurance companies to deal with longevity risk, this article investigates a natural hedging strategy and attempts to find an optimal allocation of insurance products. Unlike prior research, this proposed natural hedging model can account for both the variance and mispricing effects of longevity risk at the same time. In addition, this study employs experience mortality rates, obtained from life insurance companies, rather than population mortality data for life insurance and annuity products.

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    Bibliographic Info

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

    Volume (Year): 52 (2013)
    Issue (Month): 3 ()
    Pages: 532-541

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    Handle: RePEc:eee:insuma:v:52:y:2013:i:3:p:532-541

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

    Related research

    Keywords: Longevity risk; Natural hedging strategy; Experience mortality rates;

    References

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    1. Carter, Lawrence R. & Lee, Ronald D., 1992. "Modeling and forecasting US sex differentials in mortality," International Journal of Forecasting, Elsevier, Elsevier, vol. 8(3), pages 393-411, November.
    2. Nan Li & Ronald Lee, 2005. "Coherent mortality forecasts for a group of populations: An extension of the lee-carter method," Demography, Springer, Springer, vol. 42(3), pages 575-594, August.
    3. Melnikov, Alexander & Romaniuk, Yulia, 2006. "Evaluating the performance of Gompertz, Makeham and Lee-Carter mortality models for risk management with unit-linked contracts," Insurance: Mathematics and Economics, Elsevier, Elsevier, vol. 39(3), pages 310-329, December.
    4. Elisa Luciano & Jaap Spreeuw & Elena Vigna, 2007. "Modelling stochastic mortality for dependent lives," Carlo Alberto Notebooks, Collegio Carlo Alberto 43, Collegio Carlo Alberto.
    5. Tsai, Jeffrey T. & Wang, Jennifer L. & Tzeng, Larry Y., 2010. "On the optimal product mix in life insurance companies using conditional value at risk," Insurance: Mathematics and Economics, Elsevier, Elsevier, vol. 46(1), pages 235-241, February.
    6. Renshaw, A. E. & Haberman, S., 2003. "Lee-Carter mortality forecasting with age-specific enhancement," Insurance: Mathematics and Economics, Elsevier, Elsevier, vol. 33(2), pages 255-272, October.
    7. Michel Denuit & Pierre Devolder & Anne-C├ęcile Goderniaux, 2007. "Securitization of Longevity Risk: Pricing Survivor Bonds With Wang Transform in the Lee-Carter Framework," Journal of Risk & Insurance, The American Risk and Insurance Association, The American Risk and Insurance Association, vol. 74(1), pages 87-113.
    8. Koissi, Marie-Claire & Shapiro, Arnold F. & Hognas, Goran, 2006. "Evaluating and extending the Lee-Carter model for mortality forecasting: Bootstrap confidence interval," Insurance: Mathematics and Economics, Elsevier, Elsevier, vol. 38(1), pages 1-20, February.
    9. Ching-Syang Jack Yue & Hong-Chih Huang, 2011. "A Study of Incidence Experience for Taiwan Life Insurance," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan, Palgrave Macmillan, vol. 36(4), pages 718-733, October.
    10. Jennifer L. Wang & H.C. Huang & Sharon S. Yang & Jeffrey T. Tsai, 2010. "An Optimal Product Mix for Hedging Longevity Risk in Life Insurance Companies: The Immunization Theory Approach," Journal of Risk & Insurance, The American Risk and Insurance Association, The American Risk and Insurance Association, vol. 77(2), pages 473-497.
    11. Hua Chen & Samuel H. Cox, 2009. "Modeling Mortality With Jumps: Applications to Mortality Securitization," Journal of Risk & Insurance, The American Risk and Insurance Association, The American Risk and Insurance Association, vol. 76(3), pages 727-751.
    12. 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, The American Risk and Insurance Association, vol. 73(4), pages 647-672.
    13. Andrew J. G. Cairns & David Blake & Kevin Dowd, 2006. "A Two-Factor Model for Stochastic Mortality with Parameter Uncertainty: Theory and Calibration," Journal of Risk & Insurance, The American Risk and Insurance Association, The American Risk and Insurance Association, vol. 73(4), pages 687-718.
    14. Chris Wilson, 2001. "On the Scale of Global Demographic Convergence 1950-2000," Population and Development Review, The Population Council, Inc., The Population Council, Inc., vol. 27(1), pages 155-171.
    15. Brouhns, Natacha & Denuit, Michel & Vermunt, Jeroen K., 2002. "A Poisson log-bilinear regression approach to the construction of projected lifetables," Insurance: Mathematics and Economics, Elsevier, Elsevier, vol. 31(3), pages 373-393, December.
    16. repec:cup:cbooks:9780521118255 is not listed on IDEAS
    17. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, Econometric Society, vol. 53(2), pages 385-407, March.
    18. Kevin Dowd & David Blake & Andrew J. G. Cairns & Paul Dawson, 2006. "Survivor Swaps," Journal of Risk & Insurance, The American Risk and Insurance Association, The American Risk and Insurance Association, vol. 73(1), pages 1-17.
    19. Renshaw, A.E. & Haberman, S., 2006. "A cohort-based extension to the Lee-Carter model for mortality reduction factors," Insurance: Mathematics and Economics, Elsevier, Elsevier, vol. 38(3), pages 556-570, June.
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    Cited by:
    1. Petar Jevtic' & Luca Regis, 2014. "Assessing the solvency of insurance portfolios via a continuous time cohort model," Working Papers, IMT Institute for Advanced Studies Lucca 7/2014, IMT Institute for Advanced Studies Lucca, revised Jul 2014.

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