Hedging Longevity Risk in Life Settlements Using Biomedical Research-Backed Obligations

In the life settlement market, mortality risk is transferred from life insurance policyholders to third-party life settlement firms. This risk transfer occurs in conjunction with an information transfer that is relevant not only for pricing, but also for risk management. In this analysis, we compare the efficiency of two different hedging instruments in managing the mortality risk of the life settlement firm. First, we claim and then demonstrate that conventional longevity-linked securities do not perform as effectively in the secondary life market, that is, life settlement market, as in the annuity and pension markets due to the basis risk that exists between the general population and the life settlement subgroup. Second, we show that the unique risk exposure of the life settlement firm can be specifically targeted using a new instrument—the biomedical research-backed obligations. Our finding connects two seemingly independent markets and can promote the healthy development of both.

This is the peer reviewed version of the following article: [Hedging Longevity Risk in Life Settlements Using Biomedical Research‐Backed Obligations. Journal of Risk and Insurance 84, S1 p439-458 (2017)], which has been published in final form at https://doi.org/10.1111/jori.12200. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions: https://authorservices.wiley.com/author-resources/Journal-Authors/licensing/self-archiving.html#3.

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Work Title Hedging Longevity Risk in Life Settlements Using Biomedical Research-Backed Obligations
Access
Open Access
Creators
  1. Richard D. MacMinn
  2. Nan Zhu
Keyword
  1. Life settlement
  2. Longevity risk
  3. Longevity hedging
  4. Longevity forwards
  5. Biomedical research-backed obligations
  6. Ambiguity aversion
License In Copyright (Rights Reserved)
Work Type Article
Publisher
  1. Journal of Risk and Insurance
Publication Date February 2, 2017
Publisher Identifier (DOI)
  1. https://doi.org/10.1111/jori.12200
Deposited November 22, 2023

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Version 1
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  • Created
  • Added Life_Settlements_BioMedical_Hedging_Main-1.pdf
  • Added Creator Richard D. MacMinn
  • Added Creator Nan Zhu
  • Published
  • Updated Keyword Show Changes
    Keyword
    • Life settlement, Longevity risk, Longevity hedging, Longevity forwards, Biomedical research-backed obligations, Ambiguity aversion
  • Updated