Abstract
In a discrete time framework we consider a life insurer who is able to buy a securitization product to hedge mortality. Two cohorts are considered: one underlying the securitization product and one for the portfolio of the insurer. In a general setting, we show that there exists a unique strategy that maximizes the insurer’s expected utility from terminal wealth. We then numerically illustrate our findings: in a Gompertz–Makeham model, where the realized survival probabilities can fluctuate moderately within an ε-corridor, as well as in a toy model for mortality shocks. In both examples the insurer can hedge longevity risk by trading in a survival bond.
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