A Value Based Cohort Index for Longevity Risk Management

22 Pages Posted: 26 Feb 2015

See all articles by Yang Chang

Yang Chang

School of Risk and Actuarial Studies, ARC Center of Excellence in Population Ageing Research (CEPAR); Quantitative Finance Research Centre

Michael Sherris

University of New South Wales - ARC Centre of Excellence in Population Ageing Research and School of Risk and Actuarial Studies; UNSW Australia Business School

Date Written: February 25, 2015

Abstract

Existing longevity indices commonly use age-based mortality rates or period life expectancy. We propose an alternative cohort-based value index for insurers and pension funds to manage longevity risk. This index is an expected present value of a longevity linked cash flow valued using a specified cohort mortality model and a commonly used interest rate model. Since interest rate and longevity risk are inherent with any longevity linked obligation and interest rate risk can be effectively hedged, this index will provide a better measure of the longevity risk than current indices. Current mortality models are largely age-period based, so we develop a cohort based stochastic mortality model with age-dependent model parameters that provides realistic cohort correlation structures as an underlying basis for the value index. We show how the model improves fitting performance compared to other cohort models, particularly for very old ages, and has a familiar model formulation for financial market participants. We also demonstrate the hedge effectiveness of the index.

Keywords: Cohort mortality, Value index, Mortality risk, Interest rate risk, Hedge efficiency

JEL Classification: C63, G22, G12

Suggested Citation

Chang, Yang and Sherris, Michael, A Value Based Cohort Index for Longevity Risk Management (February 25, 2015). UNSW Business School Research Paper No. 2015ACTL02. Available at SSRN: https://ssrn.com/abstract=2569507 or http://dx.doi.org/10.2139/ssrn.2569507

Yang Chang (Contact Author)

School of Risk and Actuarial Studies, ARC Center of Excellence in Population Ageing Research (CEPAR) ( email )

Australian School of Business Building
University of New South Wales
Sydney, New South Wales NSW 2052
Australia

Quantitative Finance Research Centre ( email )

University of Technology, Sydney
Sydney, New South Wales 2000
Australia

Michael Sherris

University of New South Wales - ARC Centre of Excellence in Population Ageing Research and School of Risk and Actuarial Studies ( email )

UNSW Business School
Risk and Actuarial Studies
Sydney, NSW 2052
Australia
+61 2 9385 2333 (Phone)
+61 2 9385 1883 (Fax)

HOME PAGE: http://www.asb.unsw.edu.au/schools/Pages/MichaelSherris.aspx

UNSW Australia Business School ( email )

Sydney, NSW 2052
Australia

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
72
Abstract Views
1,105
rank
335,800
PlumX Metrics