Forward Mortality Rates in Discrete Time II: Longevity Risk and Hedging Strategies

Abstract

Longevity risk has emerged as an important risk in the early 21 st century for the providers of pension benefits and annuities. Any changes in the assumptions for future mortality rates can have a major financial impact on the valuation of these liabilities and motivates many of the longevity-linked securities that have been proposed to hedge this risk. Using the framework developed in Hunt and Blake (2015b), we investigate how these assumptions can change over a one-year period and the potential for hedging longevity risk in an illustrative annuity

A Bayesian Approach to Modeling and Projecting Cohort Effects

“…In Hunt and Blake (2016), this is relaxed and the year of observation is allowed to change to reflect the impact of new observations on the previously estimated cohort parameters.9 This is a consequence of having a simplified age/cohort structure and setting β (0)x = 1, discussed inHunt and Blake (2015d).…”

“…The model could, theoretically, be extended to allow for more lags and an AR(p) structure via a different choice for Γ y .11 While the distribution for γ x y is not used here, it is necessary when updating the estimates of the cohort parameters for additional data, as done inHunt and Blake (2016).…”