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Pricing and hedging of longevity basis risk through securitisation

Author

Listed:
  • Zeddouk, Fadoua
  • Devolder, Pierre

    (Université catholique de Louvain, LIDAM/ISBA, Belgium)

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, 2023. "Pricing and hedging of longevity basis risk through securitisation," LIDAM Reprints ISBA 2023033, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    • Handle: RePEc:aiz:louvar:2023033
    DOI: https://doi.org/10.1017/asb.2023.37
    Note: In: ASTIN Bulletin, 2024, vol. 54(1), p. 159-184
    as

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