Modeling and pricing of the longevity risk

Details

Supervisors

Devolder, Pierre ; Hendrickx, Julien

Faculty

Ecole polytechnique de Louvain

Degree label

Master [120] : ingénieur civil en mathématiques appliquées

Abstract

Longevity risk is undoubtedly one of the major risks for the next decades. On one hand, people living longer is synonym of a real evolution in the social environment and the healthcare industry. But, on the other hand, the longevity risk raises financial concerns within insurers, annuity providers and more importantly governments, as it puts their financial solvency at risk. Thereby threatening the global stability of the financial market. In this paper, we will present the most popular stochastic mortality models that try to capture this longevity phenomenon as precisely as possible. Both discrete models, such as the Lee-Carter and the Cairns Blake Dowd models, and more recent continuous models, such as the Feller and Ornstein-Uhlenbeck models, will be discussed. The longevity risk being systematic, it is not hedgeable via classical insurance pooling. Instead, all eyes are oriented toward capital markets which present an interesting securization opportunity. The second part of this paper will therefore be devoted to understanding how the major longevity-linked securities, i.e. survivor-forwards, longevity swaps and longevity bonds, can be priced. Various possibilities will be explored with a particular stress on the equivalent utility pricing method.