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Risks 2018, 6(1), 10; https://doi.org/10.3390/risks6010010

Longevity Risk Management and the Development of a Value-Based Longevity Index

School of Risk and Actuarial Studies and CEPAR, UNSW Business School, Sydney 2052, Australia
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Received: 17 January 2017 / Revised: 18 January 2018 / Accepted: 8 February 2018 / Published: 11 February 2018
(This article belongs to the Special Issue Designing Post-Retirement Benefits in a Demanding Scenario)
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Abstract

The design and development of post-retirement income products require the assessment of longevity risk, as well as a basis for hedging these risks. Most indices for longevity risk are age-period based. We develop and assess a cohort-based value index for life insurers and pension funds to manage longevity risk. There are two innovations in the development of this index. Firstly, the underlying variables of most existing longevity indices are based on mortality experience only. The value index is based on the present value of future cash flow obligations, capturing all the risks in retirement income products. We use the index to manage both longevity risk and interest rate risk. Secondly, we capture historical dependencies between ages and cohorts with a cohort-based stochastic mortality model. We achieve this by introducing age-dependent model parameters. With our mortality model, we obtain realistic cohort correlation structures and improve the fitting performance, particularly for very old ages. View Full-Text
Keywords: retirement income risk; cohort mortality; value index; mortality risk; interest rate risk; hedge efficiency retirement income risk; cohort mortality; value index; mortality risk; interest rate risk; hedge efficiency
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This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).
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Chang, Y.; Sherris, M. Longevity Risk Management and the Development of a Value-Based Longevity Index. Risks 2018, 6, 10.

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