Johnny S'H' Li and Mary R' Hardy

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Johnny S.H. Li and Mary R. Hardy

• Measuring Basis Risk Involved in Longevity Hedges

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• The topic of the research presents, from a
  theoretically point of view, interesting aspects
  and observations related to the longevity risk
  and q-forward market.

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• It takes into account how to manage the longevity
  risk referring to two crucial aspects
• the basis risk valuation
• the mortality linked securities.

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• As regards the basis risk, it depends on the
  mismatch between the broad population mortality
  indexes and the pensions plans own mortality
  experience.

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• As regards the mortality linked-securities, there
  are two types of mortality-linked contracts.

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• 1) The first type is represented by the contracts
  that are linked to the actual mortality
  experience of the pension plan's own portfolio.

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• 2) The second type is standardized contracts that
  are based on the mortality experience of a
  certain national population.

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• The q forward product is a derivative involving
  the exchange of the realized mortality rate at
  some future date, in return for a fixed mortality
  rate agreed at inception.

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• By increasing the time horizon, one objection
  sometimes made to a longer maturity longevity
  securities linked was that for financial
  institutions there is a difficult to deal in
  ultra-long securities because of illiquidity of
  the markets.

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• Recent change in the insurance policy makes this
  argument harder to sustain

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• To conclude
• The research is very fertile because of the
  several suggestion for reflecting on.
• It finally suggests the exploration in other
  fields as for instance the valuation of basis
  risk in the pricing framework.