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Securitization of Longevity Risk Using Percentile Tranching
Author(s) -
Kim Changki,
Choi Yangho
Publication year - 2011
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/j.1539-6975.2010.01383.x
Subject(s) - securitization , tranche , percentile , issuer , longevity risk , bond , annuity , actuarial science , economics , structured finance , credit risk , econometrics , computer science , financial economics , business , finance , statistics , mathematics , pension , life annuity , financial crisis , macroeconomics
Securitizations that transfer risk to the financial markets are a potential solution to longevity risk in the annuity business. The classical Lee–Carter model is applied to generate the future stochastic survival distribution. A method to design inverse survivor bonds using percentile tranches and to calculate the security prices is presented. The percentile tranche method is a simple and practical way for the issuer to design and price the security. This method can serve to identify the risk–yield relationship, which can provide investors with clear insight regarding the appropriate choice of tranches.