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If we can simulate it, we can insure it: An application to longevity risk management

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  • M. Martin Boyer
  • Lars Peter Stentoft

Abstract

This paper proposes a unified framework for measuring and managing longevity risk. Specifically, we develop a flexible framework for valuing survivor derivatives like forwards, swaps, as well as options both of European and American style. Our framework is essentially independent of the assumed underlying dynamics and the choice of method for risk neutralization and relies only on the ability to simulate from the risk neutral process. We provide an application to derivatives on the survivor index when the underlying dynamics are from a Lee-Carter model. Our results show that taking the optionality into consideration is important from a pricing perspective.

Suggested Citation

  • M. Martin Boyer & Lars Peter Stentoft, 2012. "If we can simulate it, we can insure it: An application to longevity risk management," CIRANO Working Papers 2012s-08, CIRANO.
  • Handle: RePEc:cir:cirwor:2012s-08
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    File URL: http://www.cirano.qc.ca/files/publications/2012s-08.pdf
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    Cited by:

    1. 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.
    2. M. Martin Boyer & Joanna Mejza & Lars Stentoft, 2014. "Measuring Longevity Risk: An Application to the Royal Canadian Mounted Police Pension Plan," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 17(1), pages 37-59, March.
    3. James Risk & Michael Ludkovski, 2015. "Statistical Emulators for Pricing and Hedging Longevity Risk Products," Papers 1508.00310, arXiv.org, revised Sep 2015.
    4. Damiaan Chen & Roel Beetsma & Dirk Broeders, 2015. "Stability of participation in collective pension schemes: An option pricing approach," DNB Working Papers 484, Netherlands Central Bank, Research Department.
    5. repec:eee:insuma:v:74:y:2017:i:c:p:182-196 is not listed on IDEAS

    More about this item

    Keywords

    Least squares Monte Carlo; Longevity risk; Reinsurance; Simulation.;

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • O2 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • D2 - Microeconomics - - Production and Organizations

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