Securitization of longevity risk – survivor swap perspective

Abstract

Purpose

The purpose of this paper is to present a clear path to securitize the longevity risk with two distinct swaps in order to inspire a new Chinese life market.

Design/methodology/approach

Studies on longevity risk securitization consist of three aspects, respectively, instrument design, pricing methodology and mortality projection. The swaps designed are referenced, respectively, to vanilla and complex survivor swaps (Dowd et al., 2006; Lin and Cox, 2005). Methods applied are RHH model and Gompertz law for mortality projection, as well as two-factor Wang transformation for pricing.

Findings

This paper figures out the market price of risk in Chinese annuity market, checks for the sensitivity of the price to parameters and tests the hedging effects by Monte Carlo simulation.

Originality/value

Based on the theoretical and numerical results, this paper suggests an effective way to possibly witness the birth of New Life Market in China.

Citation

Zou, X., Ye, Z. and Zhang, Q. (2016), "Securitization of longevity risk – survivor swap perspective", China Finance Review International, Vol. 6 No. 4, pp. 322-341. https://doi.org/10.1108/CFRI-06-2015-0092