Pricing and hedging of longevity basis risk through securitization

Zeddouk, Fadoua;Devolder, Pierre
(2022) , 33 pages

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  • Zeddouk, FadouaUCLouvain
    Author
  • Devolder, PierreUCLouvain
    Author
Abstract
Hedging the basis risk is a challenging issue for pension funds and insurers, who can be interested in longevity-linked securities to transfer their longevity risk. These derivatives are based on a given population data rather than their own policy data, which may lead to a potential loss due to data mismatch. In this paper we propose a pricing approach under Solvency II to evaluate the longevity basis risk through securitization, by associating this risk to the payo􏰀 of a longevity derivative. This method is then compared to other classical pricing methods used in finance. We assess and analyze di􏰀erent hedging strategies for 􏰁rms facing basis risk, using a multipopulation model based on a two-dimensional Hull and White model to represent the evolution of mortality over time.
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Zeddouk, F., & Devolder, P. (2022). Pricing and hedging of longevity basis risk through securitization (LIDAM Discussion Paper ISBA 2022/38). https://hdl.handle.net/2078.5/128067