Articlegreen2015

Single‐ and Cross‐Generation Natural Hedging of Longevity and Financial Risk

Elisa Luciano · Luca Regis · Elena Vigna

33 citations0/0 files storedJournal of Risk & Insurance

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Insurance, Mortality, Demography, Risk Management Insurance and Financial Risk Management Stochastic processes and financial applications

Abstract

This article provides natural hedging strategies for life insurance and annuity businesses written on a single generation or on different generations in the presence of both longevity and interest‐rate risks. We obtain closed‐form solutions for delta and gamma hedges against cohort‐based longevity risk. We exploit the correlation between the mortality intensities of different generations and hedge the longevity risk of one cohort with products on other cohorts. An application with UK data on survivorship and bond dynamics shows that hedging is effective, even when rebalancing is infrequent.

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References

1992Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation 2000Transform Analysis and Asset Pricing for Affine Jump-diffusions 1990Pricing Interest-Rate-Derivative Securities 2001Survivor Bonds: Helping to Hedge Mortality Risk 2006Pricing Death: Frameworks for the Valuation and Securitization of Mortality Risk 2008Modelling and management of mortality risk: a review 2006Longevity Bonds: Financial Engineering, Valuation, and Hedging 2009An Optimal Product Mix for Hedging Longevity Risk in Life Insurance Companies: The Immunization Theory Approach

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