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Single‐ and Cross‐Generation Natural Hedging of Longevity and Financial Risk
Author(s) -
Luciano Elisa,
Regis Luca,
Vigna Elena
Publication year - 2017
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/jori.12104
Subject(s) - longevity , longevity risk , hedge , annuity , survivorship curve , bond , exploit , actuarial science , life annuity , life insurance , economics , cohort , business , finance , demography , biology , medicine , gerontology , computer science , ecology , population , computer security , pension , sociology
This article provides natural hedging strategies for life insurance and annuity businesses written on a single generation or on different generations in the presence of both longevity and interest‐rate risks. We obtain closed‐form solutions for delta and gamma hedges against cohort‐based longevity risk. We exploit the correlation between the mortality intensities of different generations and hedge the longevity risk of one cohort with products on other cohorts. An application with UK data on survivorship and bond dynamics shows that hedging is effective, even when rebalancing is infrequent.