Technical Issues in Securitization of Longevity Risk

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Over the past 100 years, life expectancies in the developed world have increased at a rate of approximately 2.5 years per decade. The enormous improvement in longevity is one of the greatest achievements of modern civilization, but, to the extent that it is unanticipated, longevity improvement can pose problems to governments and pension plans. The adverse impact of under-estimating longevity improvement is huge, especially in the current low interest rate environment where future pension and annuity liabilities are not heavily discounted. Recently, some pension providers have sought solutions to the problem of longevity risk from capital markets. They trade, with counterparties such as investment banks, securities that are linked to future longevity improvements. Since its emergence in early 2000s, the market for longevity risk securitization has developed slowly. The slow development is due partly to several important technical issues that are yet to be resolved. In this research project, the investigator will focus on some of these issues. Specifically, the objectives of this project are threefold: (1) to develop multi-population stochastic mortality models, which are useful for participants in the longevity risk market; (2) to develop methods for pricing more complicated longevity securitizations that have recently emerged; (3) to develop strategies that permit pension plans to hedge their longevity risk exposures effectively. It is expected that the results of the proposed research will accelerate the growth of the longevity risk market, facilitating the shift of longevity risk to parties who are better able to handle its financial consequences.