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Hedging Longevity Risk: Does the Structure of the Financial Instrument Matter?

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  • Richard D. MacMinn
  • Nan Zhu

Abstract

Longevity-linked securities can be constructed either as cash flow hedging instruments or as value hedging instruments. This article studies the interaction between the structure of longevity-linked securities and shareholder value. Relying on a strand of literature that investigates corporate risk management decisions made in the interests of shareholders, we present a framework that compares cash flow hedges with value hedges. Both our theoretical model and numerical experiments show that value hedging dominates cash flow hedging in the context of management decisions being made to maximize shareholder value. This finding provides an explanation for the failure of some attempted issues of longevity risk transfer instruments and suggests efficient alternate structures.

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  • Richard D. MacMinn & Nan Zhu, 2021. "Hedging Longevity Risk: Does the Structure of the Financial Instrument Matter?," North American Actuarial Journal, Taylor & Francis Journals, vol. 25(S1), pages 373-384, February.
    • Handle: RePEc:taf:uaajxx:v:25:y:2021:i:s1:p:s373-s384
    DOI: 10.1080/10920277.2019.1650286
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    Cited by:

    1. Blake, David & Cairns, Andrew J.G., 2021. "Longevity risk and capital markets: The 2019-20 update," Insurance: Mathematics and Economics, Elsevier, vol. 99(C), pages 395-439.

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