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Mortality Indices: Construction and Applications to Securitization

MARCH 27 2014

Presenter: J. Li, University of Waterloo, Statistics and Actuarial Science Research (Podcast)
Stream: Long Horizon and Longevity Risks in Insurance (Stream 2, Track A)
Discussant: G. Graziani, Senior Vice President and Head of Longevity, North America at Swiss Re (Podcast)

Pension plan sponsors can mitigate their longevity risk exposure by trading securities that are linked to future realized mortality. To date, the market for such securities is still in its infancy and has yet to overcome a number of challenges, one of which is the creation of homogeneous and transparent instruments. A significant step in overcoming this challenge is to develop tractable mortality indices, upon which standardized mortality-linked securities can be written.

  1. Li introduced the CBD mortality indices, which are developed by an innovative model-based methodology. He then used the CBD mortality indices to construct a graphical longevity risk metric, which allows practitioners to easily compare the longevity risk exposures of different portfolios. Mr. Li also explained how a standardized security called K-forward can be written on the CBD mortality indices, and discussed how a longevity hedge can be formed by K-forward contracts.
  2. Graziani said that it is a very interesting index but raised some doubts about the ability of the index to attract capital market investors to take on longevity risk. Moreover, he said that the index does not handle older ages 90+, which is critical for longevity risk.