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Towards a Large and Liquid Longevity Market: A Graphical Population Basis Risk Metric

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  • Wai-Sum Chan

    (Department of Finance, The Chinese University of Hong Kong, 1226 Cheng Yu Tung Building, Shatin, Hong Kong, Hong Kong.)

  • Johnny S-H Li

    (Department of Statistics and Actuarial Science, University of Waterloo, Waterloo, Ontario, Canada N2L 3G1 E-mails: shli@uwaterloo.ca; q23zhou@uwaterloo.ca)

  • Kenneth Q Zhou

    (Warren Centre for Actuarial Studies and Research, University of Manitoba, Winnipeg, Manitoba, Canada R3T 5V4.)

  • Rui Zhou

    (Warren Centre for Actuarial Studies and Research, University of Manitoba, Winnipeg, Manitoba, Canada R3T 5V4.)

Abstract

Pension plan sponsors and annuity providers can offload their longevity risk exposures by trading securities that are linked to broad-based mortality indexes. However, a hedge constructed in this way is subject to population basis risk, arising from the difference in mortality improvements between the hedger’s population and the reference population to which the security is linked. To address this problem, which is believed to be a major obstacle to market development, in this paper we contribute a graphical population basis risk metric. The graphical metric allows market participants to not only visually evaluate the extent of population basis risk, but also determine the most appropriate reference population. We illustrate this concept with a hypothetical example.

Suggested Citation

  • Wai-Sum Chan & Johnny S-H Li & Kenneth Q Zhou & Rui Zhou, 2016. "Towards a Large and Liquid Longevity Market: A Graphical Population Basis Risk Metric," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 41(1), pages 118-127, January.
    • Handle: RePEc:pal:gpprii:v:41:y:2016:i:1:p:118-127
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    Cited by:

    1. Leung, Melvern & Fung, Man Chung & O’Hare, Colin, 2018. "A comparative study of pricing approaches for longevity instruments," Insurance: Mathematics and Economics, Elsevier, vol. 82(C), pages 95-116.
    2. Marcel Bräutigam & Montserrat Guillén & Jens P. Nielsen, 2017. "Facing Up to Longevity with Old Actuarial Methods: A Comparison of Pooled Funds and Income Tontines," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 42(3), pages 406-422, July.

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