Abstract
We propose a multi-cohort model that is able to capture the mortality correlation between different cohorts. The model is based on the Hull and White process to which we incorporate inter-generational risk factors, by modifying its stochastic part. We provide a pricing framework for a new survival forward contract under the Cost of Capital, risk-neutral and Sharpe approaches, allowing to cover the global multi-cohort longevity risk. We give numerical illustrations for Belgian cohorts, and we compute the price of the longevity derivative under the proposed methods, for different correlation levels.
Highlights
Insurance companies and pension funds are constantly exposed to mortality risk, and they are, becoming increasingly interested in longevity-linked securities to transfer this risk.only a few longevity derivatives have been launched for various reasons
We propose a multi-cohort model that is able to capture the mortality correlation between different cohorts
We provide a pricing framework for a new survival forward contract under the Cost of Capital, risk-neutral and Sharpe approaches, allowing to cover the global multi-cohort longevity risk
Summary
Insurance companies and pension funds are constantly exposed to mortality risk, and they are, becoming increasingly interested in longevity-linked securities to transfer this risk.only a few longevity derivatives have been launched for various reasons. One important cause is that no consensus has yet been reached regarding the best model for the mortality risk. The common trend in the evolution of the longevity of different populations is relevant, and it should be taken into account by entities seeking to hedge their exposures to mortality and/or longevity risk, as discussed in detail in Coughlan et al (2011). In this way, these entities can assess the overall longevity risk, and reduce the basis risk between their own population and population associated with the hedging instruments
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