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

See all articles by Elisa Luciano

Elisa Luciano

Collegio Carlo Alberto; University of Turin - Department of Statistics and Applied Mathematics

Luca Regis

University of Turin

Elena Vigna

University of Turin - Faculty of Economics; Collegio Carlo Alberto; CeRP

Date Written: May 14, 2015

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.

Suggested Citation

Luciano, Elisa and Regis, Luca and Vigna, Elena, Single- and Cross-Generation Natural Hedging of Longevity and Financial Risk (May 14, 2015). Journal of Risk and Insurance, Forthcoming, Carlo Alberto Notebooks, n.257, June 2012 (Revised May 2015), Available at SSRN: https://ssrn.com/abstract=2148324 or http://dx.doi.org/10.2139/ssrn.2148324

Elisa Luciano (Contact Author)

Collegio Carlo Alberto ( email )

via Real Collegio 30
Moncalieri, Torino 10024
Italy

HOME PAGE: http://www.carloalberto.org/people/faculty/fellows/luciano/

University of Turin - Department of Statistics and Applied Mathematics ( email )

Corso Unione Sovietica 218 bis
Turin, I-10122
Italy
+ 39 011 6705230 (Phone)

Luca Regis

University of Turin ( email )

Corso Unione Sovietica 218 bis
Torino, Turin 10100
Italy

Elena Vigna

University of Turin - Faculty of Economics ( email )

Dipartimento di Statistica e Matematica Applicata
Corso Unione Sovietica 218 bis
Torino, 10134
Italy

Collegio Carlo Alberto ( email )

via Real Collegio 30
Moncalieri, Torino 10024
Italy

CeRP ( email )

Via Real Collegio, 30
Moncalieri, Turin 10024
Italy

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