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Pricing and hedging of longevity basis risk through securitisation

Published online by Cambridge University Press:  27 December 2023

Fadoua Zeddouk Open the ORCID record for Fadoua Zeddouk [Opens in a new window]  and
Pierre Devolder
Fadoua Zeddouk*
Affiliation:
Institute of Statistics, Biostatistics and Actuarial Sciences, Catholic University of Louvain, Voie du Roman Pays 20, 1348 Louvain-La-Neuve, Belgium
Pierre Devolder
Affiliation:
Institute of Statistics, Biostatistics and Actuarial Sciences, Catholic University of Louvain, Voie du Roman Pays 20, 1348 Louvain-La-Neuve, Belgium
*
Corresponding author: Fadoua Zeddouk; Email: f.zeddouk@hotmail.com
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Abstract

Pension funds and insurers face difficulties in hedging their longevity risk, which is the uncertainty of how long their clients will live. A possible solution could be using longevity-linked securities to transfer some of this risk to other parties. However, these securities may not match the actual mortality rates of the insurer’s clients, resulting in a potential loss due to basis risk. In this paper, we measure this basis risk through the pricing of a longevity derivative under Solvency II. We also compare this method with other common pricing methods in finance. We explore and evaluate different hedging strategies for insurers, using a multi-population model derived from a two-dimensional Hull and White model that captures the dynamics of mortality over time.

Keywords

Longevity basis risklongevity-linked securitiescost of capitalbasis risksolvency capital requirementmulti-population mortality model
Type
Research Article
Information
ASTIN Bulletin: The Journal of the IAA , Volume 54 , Issue 1 , January 2024 , pp. 159 - 184
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of The International Actuarial Association

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