If We Can Simulate it, We Can Insure it: An Application to Longevity Risk Management

42 Pages Posted: 9 May 2012

See all articles by M. Martin Boyer

M. Martin Boyer

HEC Montreal - Department of Finance

Lars Stentoft

Department of Economics, University of Western Ontario; Center for Interuniversity Research and Analysis on Organization (CIRANO); Aarhus University - CREATES

Date Written: April 9, 2012

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.

Keywords: Least squares Monte Carlo, Longevity risk, Reinsurance, Simulation

JEL Classification: G22, G23

Suggested Citation

Boyer, M. Martin and Stentoft, Lars, If We Can Simulate it, We Can Insure it: An Application to Longevity Risk Management (April 9, 2012). CIRANO - Scientific Publications 2012s-08. Available at SSRN: https://ssrn.com/abstract=2055293 or http://dx.doi.org/10.2139/ssrn.2055293

M. Martin Boyer (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

Lars Stentoft

Department of Economics, University of Western Ontario ( email )

London, Ontario N6A 5B8
Canada

Center for Interuniversity Research and Analysis on Organization (CIRANO)

2020 rue University, 25th floor
Montreal H3C 3J7, Quebec
Canada

Aarhus University - CREATES

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

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