On the pricing of longevity-linked securities

Bauer, Daniel J.; Börger, Matthias; Ruß, Jochen

doi:10.1016/j.insmatheco.2009.06.005

Cited by 114 publications

(91 citation statements)

References 39 publications

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“…The author compares the Standard model results with a 99.5th percentile VaR approach, based on a modified version of the forward mortality model introduced by Bauer et al (2008Bauer et al ( , 2010. The assets were assumed to be invested in risk-free assets.…”

Section: Literature Reviewmentioning

confidence: 99%

Economic capital for defined benefit pension schemes: An application to the UK Universities Superannuation Scheme

Porteous

Tapadar

Yang

2012

Journal of Pension Economics and Finance

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This article considers the amount of economic capital that defined benefit pension schemes potentially need to cover the risks they are running. A real open scheme, the Universities Superannuation Scheme, is modelled and used to illustrate our results and, as expected, economic capital requirements are large. We discuss the appropriateness of these results and what they mean for the defined benefit pension scheme industry and their sponsors. The article is particularly pertinent following the recent European Commission Green Paper on the future of European pensions systems, its call for advice on reviewing the Institutions for Occupational Retirement Provision Directive and the introduction of the Basel 2 and Solvency 2 risk-based regulatory regimes for banking and insurance respectively. keywordsDefined benefit pension scheme, Economic capital, Solvency, Stochastic modelling, Asset-liability management.

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Section: Literature Reviewmentioning

confidence: 99%

Economic capital for defined benefit pension schemes: An application to the UK Universities Superannuation Scheme

Porteous

Tapadar

Yang

2012

Journal of Pension Economics and Finance

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“…We select the model among seven stochastic models that best fits our data according to the Bayes Information Criterion (BIC), an objective model selection criterion based on the statistical quality of fit 1 . The seven models we compared are taken from the paper of Cairns et al [7] and include the Lee-Carter model, its extension proposed by Renshaw and Haberman, the Age-Period-Cohort model introduced by Currie, the Cairns-Blake-Dowd model and three extensions which add a cohort effect, a quadratic term to the age effect and a different form of the cohort effect, respectively.…”

Section: The Mortality Modelmentioning

confidence: 99%

“…the premium that a life insurer or pension plan might be willing to pay to release such a risk. Many authors have addressed the question of how to price longevity-linked securities, but the calibration of the market price of longevity risk remains an open question (see Bauer et al [1] for a review and comparison of different pricing approaches). Some authors explored the possibility to link the price of longevity-linked securities to the amount that the insurer should hold to cover unexpected losses.…”

Section: Introductionmentioning

confidence: 99%

Maximum Market Price of Longevity Risk Under Solvency Regimes: The Case Of Solvency II

Levantesi¹,

Menzietti²

2017

Preprint

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Longevity risk constitutes an important risk factor for life insurance companies and it can be managed through longevity-linked securities. The market of longevity-linked securities is at present far from being complete and does not allow to find a unique pricing measure. We propose a method to estimate the maximum market price of longevity risk depending on the risk margin implicit within the calculation of the technical provisions as defined by Solvency II. The maximum price of longevity risk is determined for a survivor forward (S-forward), an agreement between two counterparties to exchange at maturity a fixed survival-dependent payment for a payment depending on the realized survival of a given cohort of individuals. The maximum prices determined for the S-forwards can be used to price other longevity-linked securities, such as q-forwards. The Cairns-Blake-Dowd model is used to represent the evolution of mortality over time, that combined with the information on the risk margin, enables us to calculate upper limits for the risk-adjusted survival probabilities, the market price of longevity risk and the S-forward prices. Numerical results can be extended for the pricing of other longevity-linked securities.

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“…However, market incompleteness implies that calibrating these pricing models remains difficult. For a recent and thorough overview of the literature on pricing longevity risk, we refer to Bauer et al (2010).…”

Section: On the Importance Of Longevity Riskmentioning

confidence: 99%

“…Determining the value of longevity-linked liabilities, however, is still a contentious issue. There is extensive literature on the pricing of longevitylinked liabilities (see, for example, Bauer et al 2010), but due to the high degree of illiquidity and market incompleteness, it remains difficult to calibrate these pricing models. Therefore, the regulator requires that the liabilities should be valued at so-called fair value.…”

Section: Funding Ratio Volatilitymentioning

confidence: 99%

Longevity Risk

2010

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SummaryMost of the western world has seen a steady increase in the average lifetime of its inhabitants over the past century. Although the past trends suggest that further changes in mortality rates are to be expected, considerable uncertainty exists regarding the future development of mortality. This type of uncertainty is referred to as longevity risk. This paper reviews the current state of the literature concerning longevity risk. First, we discuss the modeling of future mortality, including the Lee and Carter (J Am Stat Assoc 87:659-671, 1992)-approach, as well as other approaches. Second, we discuss the importance of longevity risk for the solvency of portfolios of pension and life insurance products. Finally, we investigate possibilities for longevity risk management. In particular, we consider longevity risk management through securitization and/or pension and insurance (re)design.

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On the pricing of longevity-linked securities

Cited by 114 publications

References 39 publications

Economic capital for defined benefit pension schemes: An application to the UK Universities Superannuation Scheme

Economic capital for defined benefit pension schemes: An application to the UK Universities Superannuation Scheme

Maximum Market Price of Longevity Risk Under Solvency Regimes: The Case Of Solvency II

Longevity Risk

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