Securitization of Longevity Risk Using Percentile Tranching

Securitization of Longevity Risk Using Percentile Tranching

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Article ID: iaor201112141
Volume: 78
Issue: 4
Start Page Number: 885
End Page Number: 906
Publication Date: Dec 2011
Journal: Journal of Risk and Insurance
Authors: ,
Keywords: insurance
Abstract:

Securitizations that transfer risk to the financial markets are a potential solution to longevity risk in the annuity business. The classical Lee–Carter model is applied to generate the future stochastic survival distribution. A method to design inverse survivor bonds using percentile tranches and to calculate the security prices is presented. The percentile tranche method is a simple and practical way for the issuer to design and price the security. This method can serve to identify the risk–yield relationship, which can provide investors with clear insight regarding the appropriate choice of tranches.

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