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Hedging Mortality Claims With Longevity Bonds

Author

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  • Biagini, Francesca
  • Rheinländer, Thorsten
  • Widenmann, Jan

Abstract

We study mean–variance hedging of a pure endowment, a term insurance and general annuities by trading in a longevity bond with continuous rate payments proportional to the survival probability. In particular, we discuss the introduction of a gratification annuity as an interesting insurance product for the life insurance market. The optimal hedging strategies are determined via their Galtchouk–Kunita–Watanabe decompositions under specific, yet sufficiently general model assumptions. The results are then further illustrated by assuming a general affine structure of the mortality intensity process. The optimal hedging strategies as well as the residual hedging error of a gratification annuity and a simple life annuity are finally investigated with numerical simulations, which illustrate the nice features of the gratification annuity for the insurance industry.

Suggested Citation

  • Biagini, Francesca & Rheinländer, Thorsten & Widenmann, Jan, 2013. "Hedging Mortality Claims With Longevity Bonds," ASTIN Bulletin, Cambridge University Press, vol. 43(2), pages 123-157, May.
    • Handle: RePEc:cup:astinb:v:43:y:2013:i:02:p:123-157_00
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    Citations

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    Cited by:

    1. Francesca Biagini & Yinglin Zhang, 2018. "Extended Reduced-Form Framework for Non-Life Insurance," Papers 1802.07741, arXiv.org, revised Jun 2022.
    2. Katja Schilling & Daniel Bauer & Marcus C. Christiansen & Alexander Kling, 2020. "Decomposing Dynamic Risks into Risk Components," Management Science, INFORMS, vol. 66(12), pages 5738-5756, December.
    3. Tahir Choulli & Catherine Daveloose & Mich`ele Vanmaele, 2018. "Mortality/longevity Risk-Minimization with or without securitization," Papers 1805.11844, arXiv.org.
    4. Schmeck, Maren Diane & Schmidli, Hanspeter, 2019. "Mortality Options: the Point of View of an Insurer," Center for Mathematical Economics Working Papers 616, Center for Mathematical Economics, Bielefeld University.
    5. Tahir Choulli & Catherine Daveloose & Michèle Vanmaele, 2021. "Mortality/Longevity Risk-Minimization with or without Securitization," Mathematics, MDPI, vol. 9(14), pages 1-27, July.
    6. Francesca Biagini & Yinglin Zhang, 2016. "Polynomial Diffusion Models for Life Insurance Liabilities," Papers 1602.07910, arXiv.org, revised Sep 2016.
    7. Schmeck, Maren Diane & Schmidli, Hanspeter, 2021. "Mortality options: The point of view of an insurer," Insurance: Mathematics and Economics, Elsevier, vol. 96(C), pages 98-115.
    8. Francesca Biagini & Andreas Groll & Jan Widenmann, 2016. "Risk Minimization for Insurance Products via F-Doubly Stochastic Markov Chains," Risks, MDPI, vol. 4(3), pages 1-26, July.
    9. Tahir Choulli & Catherine Daveloose & Mich`ele Vanmaele, 2015. "A martingale representation theorem and valuation of defaultable securities," Papers 1510.05858, arXiv.org, revised May 2018.
    10. Nendel, Max & Riedel, Frank & Schmeck, Maren Diane, 2021. "A decomposition of general premium principles into risk and deviation," Insurance: Mathematics and Economics, Elsevier, vol. 100(C), pages 193-209.
    11. Andrew J. G. Cairns & David Blake & Kevin Dowd & Amy R. Kessler, 2016. "Phantoms never die: living with unreliable population data," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 179(4), pages 975-1005, October.
    12. Tan, Ken Seng & Weng, Chengguo & Zhang, Jinggong, 2022. "Optimal dynamic longevity hedge with basis risk," European Journal of Operational Research, Elsevier, vol. 297(1), pages 325-337.

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