RT Journal Article
SR Electronic
T1 The Quantification of Basis Risk in Synthetic Longevity Transactions
JF Special Issues
FD Institutional Investor Journals
SP 38
OP 45
VO 2014
IS 1
A1 Chris Madsen
A1 Martijn Tans
A1 Balazs Toth
A1 Ing Tai Ching
YR 2014
UL https://pm-research.com/content/2014/1/38.abstract
AB 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.