Forward Mortality Rates in Discrete Time II: Longevity Risk and Hedging Strategies

Pensions Institute Discussion Paper, PI-1602, January 2016

48 Pages Posted: 16 Mar 2020

See all articles by Andrew Hunt

Andrew Hunt

City University London - Sir John Cass Business School

David P. Blake

City, University of London

Date Written: January 1, 2016

Abstract

Longevity risk has emerged as an important risk in the early 21st century for the providers of pension benefits and annuities. Any changes in the assumptions for future mortality rates can have a major financial impact on the valuation of these liabilities and motivates many of the longevity-linked securities that have been proposed to hedge this risk. Using the framework developed in Hunt and Blake (Forward mortality rates in discrete time I), we investigate how these assumptions can change over a one-year period and the potential for hedging longevity risk in an illustrative annuity portfolio, and find that relatively simple hedging strategies can significantly mitigate longevity risk over a one-year period.

Keywords: Mortality modelling, age/period/cohort models, forward mortality rates, longevity-linked securities, longevity hedging

JEL Classification: C11, C15, G12

Suggested Citation

Hunt, Andrew and Blake, David P., Forward Mortality Rates in Discrete Time II: Longevity Risk and Hedging Strategies (January 1, 2016). Pensions Institute Discussion Paper, PI-1602, January 2016, Available at SSRN: https://ssrn.com/abstract=3552227 or http://dx.doi.org/10.2139/ssrn.3552227

Andrew Hunt

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

David P. Blake (Contact Author)

City, University of London ( email )

106 Bunhill Row
London, EC1Y 8TZX
Great Britain
+44 (0) 20-7040-8600 (Phone)
+44 (0) 20-7040-8881 (Fax)

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