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DISCUSSION PAPER PI-0816

Securitization, Structuring and Pricing of Longevity Risk

Samuel Wills and Michael Sherris

Pricing and risk management for longevity risk has increasingly become a major
challenge for life insurers and pension funds around the world. Risk transfer to
fi nancial markets, with their major capacity for efficient risk pooling, is an area
of signifcant development for a successful longevity product market. The structuring
and pricing of longevity risk using modern securitization methods, common in
fi nancial markets, has yet to be successfully implemented for longevity risk management.
There are many issues that remain unresolved in order to ensure the successful
development of a longevity risk market. This paper considers the securitization of
longevity risk focussing on the structuring and pricing of a longevity bond using
techniques developed in the financial markets, particularly for mortgages and credit
risk. A model based on Australian mortality data and calibrated to insurance risk
linked market data is used to assess the structure and market consistent pricing of
a longevity bond. Age dependence in the securitized risks is shown to be a critical
factor in structuring and pricing longevity linked securitizations.

Keywords: Longevity risk, securitization