Securitization of Longevity Risk: Pricing Survivor Bonds With Wang Transform in the Lee‐Carter Framework

Abstract

Longevity risk is a major issue for insurers and pension funds, especially in the selling of annuity products. In that respect, securitization of this risk could offer great opportunities for hedging. This article proposes to design survivor bonds which could be issued directly by insurers. In order to guaranty some transparency in the product, the survivor bond is based on a public mortality index. The classical Lee-Carter model for mortality forecasting is used to price a risky coupon survivor bond based on this index. Copyright The Journal of Risk and Insurance, 2007.

Integrating Financial and Demographic Longevity Risk Models: An Australian Model for Financial Applications

“…Denuit, Devolder and Goderniaux (2007) [13] use the Wang (2002) [32] transform to risk-adjust mortality rates based on the Lee-Carter model, similar to Lin and Cox (2005) [21]. Cairns et al (2006a) [7] and Bauer and Russ (2006) [1] discuss limitations of the Wang transform when developing a stochastic mortality for pricing and risk management.…”

Longevity Risk and Capital Markets: The 2010–2011 Update

“…Bauer (2006), Bauer and Rub (2006), Denuit et al (2007), Barbarin (2008), Bauer et al (2010), Chen and Cummins (2010), Kogure and Kurachi (2010), Dowd et al (2011a) and Mayhew and Smith (2011). 12 For example, Dowd et al (2006).…”

Longevity-Indexed Life Annuities

“…Securitization offers an interesting alternative to reinsurance; see, e.g., Denuit, Devolder & Goderniaux (2007) and the references therein. In that respect, the first publicly offered longevity derivative was issued by the European Investment Bank (EIB) together with BNP in November 2004.…”