Longevity Basis Risk

Longevity basis risk arises because different populations, or subpopulations, will inevitably experience different longevity outcomes. This is a significant issue for those wishing to hedge longevity risk using a published mortality index – whether they be pension schemes, insurers, reinsurers, or banks.

This work will be beneficial to a wide variety of organisations and individuals, including pension schemes and their members as well as insurance companies, which write annuity business. These and other institutions which are exposed to, or would like to invest in, longevity risk will gain from a new methodology for quantifying risk related to longevity.

Phase 2: 2016/2017

The purpose of Phase 2 has been to:

• determine the most relevant metrics for measuring longevity basis risk and hedge effectiveness;
• apply the approach in Phase 1 to realistic worked examples based on appropriate data;
• present a robust quantification of basis risk to third parties such as regulators; and
• investigate the potential limitations of the time series processes.

Outputs:

• The Actuary Magazine, Jan/Feb 2018 – ‘The long game’
• Sessional Meeting, 4 December 2017, YouTube
• Sessional Meeting, 4 December 2017
• Final report - Phase 2

Phase 1: 2013/2014

Phase 1 of this research focused on producing a methodology that could be used to quantify longevity basis risk and assess the level of risk reduction that might be brought about through the use of an index-based longevity hedge. It resulted in a framework that recognised the fact that different practitioners will have different portfolios, different volumes and histories of experience data, and different constraints of the models that they can use in practice.

Outputs:

• Longevity Basis Risk: A methodology for assessing basis risk
• Longevity Basis Risk
• Sessional meeting