Pricing and Implementation of Longevity Bonds in Taiwan

Abstract

As the population ages and the deterioration of pension funds continue, hedging longevity risk is becoming increasingly important in Taiwan. This article analyzes the potential market for issuing longevity bonds to hedge against the longevity risk in Taiwan. Many recent studies have suggested that longevity bond can serve as an effective risk management tool to mitigate the longevity risks. Following the design of the longevity bond proposed by Denuit, Devolder and Godernaiaux (2007), we make an illustration of pricing longevity bond using Lee-Carter model on the basis of the mortality experience in Taiwan. Our results show that the risk premium for issuing a longevity bond in Taiwan is lower than that in the United State. However, in order to measure the longevity risk more precisely and to overcome the potential problems of issuing longevity bonds in Taiwan, the quality of mortality data should be improved and more regulations need to be amended in the near future.