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DISCUSSION PAPER PI-1602

Forward Mortality Rates in Discrete Time II: Longevity Risk and Hedging Strategies.

Andrew Hunt and David Blake.

Longevity risk has emerged as an important risk in the early 21st century for the providers of pension benefits and annuities. Any changes in the assumptions for future mortality rates can have a major financial impact on the valuation of these liabilities and motivates many of the longevity-linked securities that have been proposed to hedge this
risk. Using the framework developed in Hunt and Blake (2015b), we investigate how these assumptions can change over a one-year period and the potential for hedging longevity risk in an illustrative annuity.