A Cautionary Note on Natural Hedging of Longevity Risk

Nan Zhu, Daniel Bauer

Research output: Contribution to journalArticle

7 Citations (Scopus)

Abstract

In this article, we examine the so-called natural hedging approach for life insurers to internally manage their longevity risk exposure by adjusting their insurance portfolio. In particular, unlike the existing literature, we also consider a nonparametric mortality forecasting model that avoids the assumption that all mortality rates are driven by the same factor(s). Our primary finding is that higher order variations in mortality rates may considerably affect the performance of natural hedging. More precisely, although results based on a parametric single factor model-in line with the existing literature-imply that almost all longevity risk can be hedged, results are far less encouraging for the nonparametric mortality model. Our finding is supported by robustness tests based on alternative mortality models.

Original languageEnglish (US)
Pages (from-to)104-115
Number of pages12
JournalNorth American Actuarial Journal
Volume18
Issue number1
DOIs
StatePublished - 2014

Fingerprint

Hedging
Mortality
Mortality Rate
Factor Models
Insurance
Forecasting
Model
Higher Order
Robustness
Imply
Line
Alternatives
Longevity risk
Mortality rate
Risk exposure
Portfolio insurance
Insurer
Mortality forecasting
Factors
Robustness test

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics
  • Statistics, Probability and Uncertainty
  • Statistics and Probability

Cite this

Zhu, Nan ; Bauer, Daniel. / A Cautionary Note on Natural Hedging of Longevity Risk. In: North American Actuarial Journal. 2014 ; Vol. 18, No. 1. pp. 104-115.
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A Cautionary Note on Natural Hedging of Longevity Risk. / Zhu, Nan; Bauer, Daniel.

In: North American Actuarial Journal, Vol. 18, No. 1, 2014, p. 104-115.

Research output: Contribution to journalArticle

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