%0 Journal Article %A Chris Madsen %A Martijn Tans %A Balazs Toth %A Ing Tai Ching %T The Quantification of Basis Risk in Synthetic Longevity Transactions %D 2014 %J Special Issues %P 38-45 %V 2014 %N 1 %X The topic of basis risk in synthetic longevity transactions (where the hedge is based on a population different from the actual policy portfolio) has been a hotly debated topic. To date, no single standard has been adopted, and both regulators and market participants are increasingly pointing to this as a shortcoming in the development of the longevity risk transfer market. The authors propose a non-model specific method to decompose and quantify basis risk that is firmly grounded in economic principles. It is aligned with Solvency II and could easily be adopted by regulators as a metric for capital determination in index-based transactions. While the method is non-model specific, the authors share an example of an implementation in a stochastic mortality rate environment, in the hopes that this will help to set the stage for how basis risk is quantified in the future. %U https://guides.pm-research.com/content/iijspecial/2014/1/38.full.pdf