Longevity Risk Pricing
Longevity risks, i.e. unexpected improvements in life expectancies, may lead to severe solvency issues for annuity providers. Longevity-linked securities provide the desire hedge to annuity providers, and in the meanwhile, diversification benefits to their counterparties. But yet longevity-linked securities are not traded in financial markets due to the pricing diffi culty. This paper proposes a new method to price the longevity risk premia in order to tackle the pricing obstacle of the innovative longevity linked securities. Based on the equivalent utility pricing principle, our method obtains the minimum risk premium required by the longevity insurance seller and the maximum acceptable risk premium by the longevity insurance buyer. It satisfies four important requirements for applications in practice: i) the suitability for incomplete market pricing, ii) a narrow range of the risk premia, iii) the consistency with other financial market risk premia, and, iv) its flexibility in handling different payoff structures, basis risk and natural hedgeing possibilities. The method is applied in pricing various longevity-linked securities (bonds, swaps, caps and fbors). We show that the size of the risk premium depends on the payoff structure of the security due to the market incompleteness. Furthermore, we show that the financial strength of the longevity insurance seller and buyer, the availability of the natural hedges, and the presence of basis risk may significantly affect the size of longevity risk premium.
incomplete market pricing indifference pricing principle securitization longevity-linked securities
Jiajia Cui
Department of Finance,Tilburg University,P.O.Box 90153,5000 LE,Tilburg,the Netherlands
国际会议
大连
英文
1-35
2008-07-02（万方平台首次上网日期，不代表论文的发表时间）