Abstract
The presence of systematic risk in mortality forecasts, known as longevity risk, has called for the introduction of longevity instruments and their market development. Management of longevity risk has been an ongoing issue for insurance companies and pension funds who offer products with payout depending on the lifetime of policyholders. One of the major difficulties in pricing longevity instruments is the determination of a longevity risk-premium. This problem arises from the fact that the longevity market is illiquid and is considered to be incomplete. In this paper we provide an insight to the study of several pricing approaches for longevity instruments that have been proposed in the literature. To account for parameter uncertainty in mortality forecasts and longevity instruments pricing, our analysis hinges on a Bayesian state-space mortality model. The sampling-based Bayesian approach allows us to obtain a distribution of the longevity risk-premium, thus providing an alternative perspective in analyzing the pricing methods. We also discussed the advantages and disadvantages of the considered pricing approaches.
| Original language | English |
|---|---|
| Pages (from-to) | 95-116 |
| Number of pages | 22 |
| Journal | Insurance: Mathematics and Economics |
| Volume | 82 |
| DOIs | |
| Publication status | Published - 1 Sep 2018 |
Keywords
- Bayesian inference
- Incomplete market
- Longevity derivatives
- Markov chain Monte Carlo
- Parameter uncertainty
- State-space model
Cite this
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A comparative study of pricing approaches for longevity instruments. / Leung, Melvern; Fung, Man Chung; O'Hare, Colin.
In: Insurance: Mathematics and Economics, Vol. 82, 01.09.2018, p. 95-116.Research output: Contribution to journal › Article › Research › peer-review
TY - JOUR
T1 - A comparative study of pricing approaches for longevity instruments
AU - Leung, Melvern
AU - Fung, Man Chung
AU - O'Hare, Colin
PY - 2018/9/1
Y1 - 2018/9/1
N2 - The presence of systematic risk in mortality forecasts, known as longevity risk, has called for the introduction of longevity instruments and their market development. Management of longevity risk has been an ongoing issue for insurance companies and pension funds who offer products with payout depending on the lifetime of policyholders. One of the major difficulties in pricing longevity instruments is the determination of a longevity risk-premium. This problem arises from the fact that the longevity market is illiquid and is considered to be incomplete. In this paper we provide an insight to the study of several pricing approaches for longevity instruments that have been proposed in the literature. To account for parameter uncertainty in mortality forecasts and longevity instruments pricing, our analysis hinges on a Bayesian state-space mortality model. The sampling-based Bayesian approach allows us to obtain a distribution of the longevity risk-premium, thus providing an alternative perspective in analyzing the pricing methods. We also discussed the advantages and disadvantages of the considered pricing approaches.
AB - The presence of systematic risk in mortality forecasts, known as longevity risk, has called for the introduction of longevity instruments and their market development. Management of longevity risk has been an ongoing issue for insurance companies and pension funds who offer products with payout depending on the lifetime of policyholders. One of the major difficulties in pricing longevity instruments is the determination of a longevity risk-premium. This problem arises from the fact that the longevity market is illiquid and is considered to be incomplete. In this paper we provide an insight to the study of several pricing approaches for longevity instruments that have been proposed in the literature. To account for parameter uncertainty in mortality forecasts and longevity instruments pricing, our analysis hinges on a Bayesian state-space mortality model. The sampling-based Bayesian approach allows us to obtain a distribution of the longevity risk-premium, thus providing an alternative perspective in analyzing the pricing methods. We also discussed the advantages and disadvantages of the considered pricing approaches.
KW - Bayesian inference
KW - Incomplete market
KW - Longevity derivatives
KW - Markov chain Monte Carlo
KW - Parameter uncertainty
KW - State-space model
UR - http://www.scopus.com/inward/record.url?scp=85049729846&partnerID=8YFLogxK
U2 - 10.1016/j.insmatheco.2018.06.010
DO - 10.1016/j.insmatheco.2018.06.010
M3 - Article
VL - 82
SP - 95
EP - 116
JO - Insurance: Mathematics and Economics
JF - Insurance: Mathematics and Economics
SN - 0167-6687
ER -