Extreme Mortality Risk as a Natural Hedge?

Alison Martin, Nick Ketley and Gavin Jones

Extreme mortality risk can be defined as the risk of financial loss in the event of sudden elevated levels of mortality experience. Life (re)insurers in particular are exposed to extreme mortality risk and are particularly vulnerable to sudden spikes in mortality through their life assurance portfolios. In practice this risk largely concerns the incidence and severity of lethal pandemics and other extreme mortality events such as natural catastrophes and terrorist attacks. As longevity risk is essentially the risk of financial loss from lower than expected levels of mortality, it is intuitive to ask whether there is any offset between the two risks. This chapter explores the possibility of utilising extreme mortality risk as a natural hedge for longevity risk. Here it should be understood that the premise of the hedge is to use the income from underwriting extreme mortality as a buffer against longevity risk, with the expectation that, in the unlikely scenario of an extreme mortality event, any extreme mortality losses would be, at least partially, offset by mortality profits on the longevity portfolio.

We begin with an overview of extreme mortality risk-transfer techniques and

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