Single- and Cross-Generation Natural Hedging of Longevity and Financial Risk
Journal of Risk and Insurance, Forthcoming
Carlo Alberto Notebooks, n.257, June 2012 (Revised May 2015)
39 Pages Posted: 18 Sep 2012 Last revised: 3 Dec 2015
Date Written: May 14, 2015
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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