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Hedging Longevity Risk When Interest Rates are Uncertain

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  • Jeffrey Tsai
  • Larry Tzeng
  • Jennifer Wang

Abstract

This paper proposes an asset liability management strategy to hedge the aggregate risk of annuity providers under the assumption that both the interest rate and mortality rate are stochastic. We assume that annuity providers can invest in longevity bonds, long-term coupon bonds, and shortterm zero-coupon bonds to immunize themselves from the risks of the annuity for the equity holders subject to a required profit. We demonstrate that the optimal allocation strategy can lead to the lowest risk under different yield curves and mortality rate assumptions. The longevity bond can also be regarded as an effective hedging vehicle that significantly reduces the aggregate risk of the annuity providers.

Suggested Citation

  • Jeffrey Tsai & Larry Tzeng & Jennifer Wang, 2011. "Hedging Longevity Risk When Interest Rates are Uncertain," North American Actuarial Journal, Taylor & Francis Journals, vol. 15(2), pages 201-211.
    • Handle: RePEc:taf:uaajxx:v:15:y:2011:i:2:p:201-211
    DOI: 10.1080/10920277.2011.10597617
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    Cited by:

    1. Blake, David & Cairns, Andrew J.G., 2021. "Longevity risk and capital markets: The 2019-20 update," Insurance: Mathematics and Economics, Elsevier, vol. 99(C), pages 395-439.
    2. David Blake & Christophe Courbage & Richard MacMinn & Michael Sherris, 2011. "Longevity Risk and Capital Markets: The 2010–2011 Update," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 36(4), pages 489-500, October.
    3. Blake, David & El Karoui, Nicole & Loisel, Stéphane & MacMinn, Richard, 2018. "Longevity risk and capital markets: The 2015–16 update," Insurance: Mathematics and Economics, Elsevier, vol. 78(C), pages 157-173.
    4. Lin, Tzuling & Tsai, Cary Chi-Liang, 2013. "On the mortality/longevity risk hedging with mortality immunization," Insurance: Mathematics and Economics, Elsevier, vol. 53(3), pages 580-596.
    5. Uditha Balasooriya & Johnny Siu-Hang Li & Jackie Li, 2020. "The Impact of Model Uncertainty on Index-Based Longevity Hedging and Measurement of Longevity Basis Risk," Risks, MDPI, vol. 8(3), pages 1-27, August.
    6. David Blake & Andrew Cairns & Guy Coughlan & Kevin Dowd & Richard MacMinn, 2013. "The New Life Market," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 80(3), pages 501-558, September.

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