Extreme Mortality Risk as a Natural Hedge?
Alison Martin, Nick Ketley and Gavin Jones
Foreword
Introduction
Ageing Populations and Changing Demographics
Determinants of Changes in Life Expectancy
Magnitude of the Longevity Issue
Pricing Longevity Risk: Establishing the Base Mortality Level
An Introduction to Credibility Theory
Projecting Future Mortality
Modelling Longevity Risk under a One-Year VaR Framework
Risk Transfer for Pension Schemes
De-Risking Insured Annuity Portfolios
Hedging Longevity Risk through Reinsurance
Commercial Aspects of Longevity Reinsurance
Extreme Mortality Risk as a Natural Hedge?
Capital Markets and Longevity Risk Transfer
Longevity Indices
Longevity Policy Committee
Legal Considerations and Challenges in Longevity Risk Transactions
Pensions and Longevity in the US
Canadian Pensioner Longevity Risk
The Dutch Pensions and Longevity Insurance Market
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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