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On the pricing of longevity-linked securities

Author

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  • Bauer, Daniel
  • Börger, Matthias
  • Ruß, Jochen

Abstract

For annuity providers, longevity risk, i.e. the risk that future mortality trends differ from those anticipated, constitutes an important risk factor. In order to manage this risk, new financial products, so-called longevity derivatives, may be needed, even though a first attempt to issue a longevity bond in 2004 was not successful. While different methods of how to price such securities have been proposed in recent literature, no consensus has been reached. This paper reviews, compares and comments on these different approaches. In particular, we use data from the United Kingdom to derive prices for the proposed first longevity bond and an alternative security design based on the different methods.

Suggested Citation

  • Bauer, Daniel & Börger, Matthias & Ruß, Jochen, 2010. "On the pricing of longevity-linked securities," Insurance: Mathematics and Economics, Elsevier, vol. 46(1), pages 139-149, February.
  • Handle: RePEc:eee:insuma:v:46:y:2010:i:1:p:139-149
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Chen, Hua & MacMinn, Richard & Sun, Tao, 2015. "Multi-population mortality models: A factor copula approach," Insurance: Mathematics and Economics, Elsevier, pages 135-146.
    2. Wang, Ting & Young, Virginia R., 2016. "Hedging pure endowments with mortality derivatives," Insurance: Mathematics and Economics, Elsevier, pages 238-255.
    3. Ai, Jing & Brockett, Patrick L. & Jacobson, Allen F., 2015. "A new defined benefit pension risk measurement methodology," Insurance: Mathematics and Economics, Elsevier, pages 40-51.
    4. Shen, Yang & Siu, Tak Kuen, 2013. "Longevity bond pricing under stochastic interest rate and mortality with regime-switching," Insurance: Mathematics and Economics, Elsevier, pages 114-123.
    5. Helena Aro & Teemu Pennanen, 2013. "Liability-driven investment in longevity risk management," Papers 1307.8261, arXiv.org.
    6. repec:eee:insuma:v:76:y:2017:i:c:p:75-86 is not listed on IDEAS
    7. Chen, Bingzheng & Zhang, Lihong & Zhao, Lin, 2010. "On the robustness of longevity risk pricing," Insurance: Mathematics and Economics, Elsevier, vol. 47(3), pages 358-373, December.
    8. repec:gam:jrisks:v:5:y:2017:i:2:p:29-:d:98116 is not listed on IDEAS
    9. Hainaut, Donatien, 2012. "Multidimensional Lee–Carter model with switching mortality processes," Insurance: Mathematics and Economics, Elsevier, pages 236-246.
    10. Marcus Christiansen & Andreas Niemeyer, 2015. "On the forward rate concept in multi-state life insurance," Finance and Stochastics, Springer, vol. 19(2), pages 295-327, April.
    11. 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.
    12. Dong, Fangyuan & Wong, Hoi Ying, 2015. "Longevity bond pricing under the threshold CIR model," Finance Research Letters, Elsevier, vol. 15(C), pages 195-207.
    13. Li, Hong & De Waegenaere, Anja & Melenberg, Bertrand, 2015. "The choice of sample size for mortality forecasting: A Bayesian learning approach," Insurance: Mathematics and Economics, Elsevier, pages 153-168.
    14. Hua Chen & Michael Sherris & Tao Sun & Wenge Zhu, 2013. "Living With Ambiguity: Pricing Mortality-Linked Securities With Smooth Ambiguity Preferences," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 80(3), pages 705-732, September.
    15. Boonen, T.J. & De Waegenaere, A.M.B. & Norde, H.W., 2012. "Bargaining for Over-The Counter Risk Redistributions : The Case of Longevity Risk," Discussion Paper 2012-090, Tilburg University, Center for Economic Research.
    16. Francesco Menoncin & Luca Regis, 2015. "Longevity assets and pre-retirement consumption/portfolio decisions," Working Papers 2/2015, IMT Institute for Advanced Studies Lucca, revised May 2015.
    17. Man Chung Fung & Katja Ignatieva & Michael Sherris, 2015. "Managing Systematic Mortality Risk in Life Annuities: An Application of Longevity Derivatives," Papers 1508.00090, arXiv.org.
    18. Stevens, R.S.P. & De Waegenaere, A.M.B. & Melenberg, B., 2011. "Longevity Risk and Natural Hedge Potential in Portfolios Of Life Insurance Products : The Effect of Investment Risk," Discussion Paper 2011-036, Tilburg University, Center for Economic Research.
    19. Blackburn, Craig & Sherris, Michael, 2013. "Consistent dynamic affine mortality models for longevity risk applications," Insurance: Mathematics and Economics, Elsevier, pages 64-73.

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