open access publication

Article, 2024

Longevity hedge effectiveness using socioeconomic indices

Insurance Mathematics and Economics, ISSN 1873-5959, 0167-6687, Volume 114, Scandinavian Actuarial Journal 2016 4 2016, Pages 242-251, 10.1016/j.insmatheco.2023.11.008

Contributors

Kallestrup-Lamb, Malene 0000-0002-4412-3219 [1] Laursen, Nicolai S√łgaard (Corresponding author) [2]

Affiliations

  1. [1] Aarhus University
  2. [NORA names: AU Aarhus University; University; Denmark; Europe, EU; Nordic; OECD];
  3. [2] Copenhagen Business School
  4. [NORA names: CBS Copenhagen Business School; University; Denmark; Europe, EU; Nordic; OECD]

Abstract

This paper evaluates socioeconomic basis risk in longevity hedging. Using data for a full population stratified into socioeconomic groups, we explore the benefits and costs of two alternative hedging strategies, with and without basis risk, in the capital market. The benefit of the longevity hedge is represented by the risk reduction in the variability of a life annuity, whereas the cost is the notional amount of hedging contracts times the actuarial risk premium. We find that hedging is more cost-effective for the annuity provider when basis risk is eliminated. Moreover, it allows for a higher degree of hedge effectiveness at a cost that is equivalent to a hedge where basis risk is present. Finally, the yearly expenses related to hedging longevity risk require, at most, an extra added rate of return of no more than 0.16%.

Keywords

amount, annuity, annuity providers, basis, basis risk, benefits, capital, capital markets, contraction, contraction time, cost, cost-effective, data, degree, effect, expense, group, hedge effectiveness, hedges, index, life, life annuities, longevity, longevity hedge, longevity risk, market, population, premium, providers, rate, reduction, return, risk, risk premium, risk reduction, socioeconomic groups, socioeconomic index, time, variables, yearly expenses

Data Provider: Digital Science