Assessing Basis Risk for Longevity Transactions

143 Pages Posted: 28 Nov 2017

See all articles by Jackie Ka Ki Li

Jackie Ka Ki Li

Nanyang Technological University (NTU) - Nanyang Business School

Leonie Tickle

Macquarie University; Financial Research Network (FIRN); Macquarie University, Macquarie Business School

Chong It Tan

Macquarie University; Macquarie University, Macquarie Business School

Date Written: November 27, 2017

Abstract

Longevity basis risk arises because different populations, or subpopulations, will inevitably experience different longevity outcomes. This is a significant issue for those wishing to hedge longevity risk using a published mortality index – whether they be pension schemes, insurers, reinsurers, or banks. Put simply, actual longevity outcomes, and therefore cashflows, of the hedged portfolio will differ from those under the hedging instrument.

In addition, longevity basis risk can also present a wider issue for insurers using, in their reserving models, external data, such as population data, rather than their own policy data. The need to quantify any potential basis risk is receiving increasing focus, particularly under Solvency II.

Keywords: longevity risk, longevity basis risk, index-based hedging, longevity swap, hedge effectiveness

JEL Classification: G22

Suggested Citation

Li, Jackie Ka Ki and Tickle, Leonie and Tan, Chong It, Assessing Basis Risk for Longevity Transactions (November 27, 2017). Macquarie University Faculty of Business & Economics Research Paper . Available at SSRN: https://ssrn.com/abstract=3077651 or http://dx.doi.org/10.2139/ssrn.3077651

Jackie Ka Ki Li (Contact Author)

Nanyang Technological University (NTU) - Nanyang Business School ( email )

Singapore, 639798
Singapore

Leonie Tickle

Macquarie University ( email )

North Ryde
Sydney, New South Wales 2109
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

Chong It Tan

Macquarie University ( email )

E4A, Eastern Rd
Macquarie University
Sydney, New South Wales 2113
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

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