Longevity Hedge Effectiveness Using Socioeconomic Indices

48 Pages Posted: 29 Sep 2022

Abstract

This paper evaluates socioeconomic basis risk in longevity hedging. Using data for a full population stratified into socioeconomic groups, we explore the benefits and costs of two alternative hedging strategies, with and without basis risk, in the capital market. The benefit of the longevity hedge is represented by the risk reduction in the variability of a life annuity, whereas the cost is the notional amount of hedging contracts times the actuarial risk premium. We find that hedging is more cost-effective for the annuity provider when basis risk is eliminated. Moreover, it allows for a higher degree of hedge effectiveness at a cost that is equivalent to a hedge where basis risk is present. Finally, the yearly expenses related to hedging longevity risk requires, at most, an extra added rate of return of no more than 0.2%.

Keywords: longevity risk, hedge effectiveness, basis risk, socioeconomic groups, q-forwards

Suggested Citation

Kallestrup Lamb, Malene and Laursen, Nicolai Søgaard, Longevity Hedge Effectiveness Using Socioeconomic Indices. Available at SSRN: https://ssrn.com/abstract=4232694 or http://dx.doi.org/10.2139/ssrn.4232694

Malene Kallestrup Lamb (Contact Author)

Aarhus University ( email )

Fuglesangs Allé 4
Building 1322, Bartholins Alle 10
Aarhus C, 8000
Denmark
30257897 (Phone)

Nicolai Søgaard Laursen

Copenhagen Business School ( email )

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