A framework for assessing longevity basis risk
1 December 2014
For pension funds and insurers seeking to use index-based longevity swaps as a means of protecting against longevity trends a long-standing concern has been their effectiveness. How likely is it that the pension fund experience will deviate noticeably from the national trends underpinning the longevity indices? And how big could this deviation be?
This work, drawing heavily on the Club Vita dataset and produced in collaboration with Cass Business School and Hymans Robertson provides for the first time a robust methodology for assessing longevity basis risk. It shows that 75-80% of the total longevity risk can be hedged by the use of population indices. The accompanying User Guide provides a summary of the framework, guiding practitioners to a suitable approach given the size of the fund in question.
This work was commissioned by the Life & Longevity Markets Association and the Institute & Faculty of Actuaries.
I am delighted that the research has delivered a framework for assessing longevity basis risk. This recognises the fact that different users, with different portfolios, will have different constraints on the models they can use in practice. The research has identified specific models and techniques for different situations, which we believe will provide a good starting point for assessing basis risk.