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Pricing and hedging of longevity basis risk through securitization

Author

Listed:
  • Zeddouk, Fadoua

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

  • Devolder, Pierre

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

Abstract

Hedging the basis risk is a challenging issue for pension funds and insurers, who can be interested in longevity-linked securities to transfer their longevity risk. These derivatives are based on a given population data rather than their own policy data, which may lead to a potential loss due to data mismatch. In this paper we propose a pricing approach under Solvency II to evaluate the longevity basis risk through securitization, by associating this risk to the payo􏰀 of a longevity derivative. This method is then compared to other classical pricing methods used in finance. We assess and analyze di􏰀erent hedging strategies for 􏰁rms facing basis risk, using a multipopulation model based on a two-dimensional Hull and White model to represent the evolution of mortality over time.

Suggested Citation

  • Zeddouk, Fadoua & Devolder, Pierre, 2022. "Pricing and hedging of longevity basis risk through securitization," LIDAM Discussion Papers ISBA 2022038, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    • Handle: RePEc:aiz:louvad:2022038
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    References listed on IDEAS

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    Keywords

    Stochastic longevity risk ; longevity-linked securities ; Cost of Capital ; basis risk ; Solvency Capital Requirement ; multi-population mortality model;
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