Hedging Brevity and Longevity Risk with Mortality-based Securities by

• Main Authors: Richard Macminn, Andreas Richter
• Other Authors: The Pennsylvania State University CiteSeerX Archives
• Format: Text
• Language: English
• Subjects: Avian flu
• Online Access: http://citeseerx.ist.psu.edu/viewdoc/summary?doi=10.1.1.521.8810; http://www.macminn.org/papers/ART draft.pdf

As populations grow and change, markets integrate and medical science advances, the character and structure of the risks faced by governments, corporations and individuals also change. The threat of SARS in 2003 and avian flu in 2004 have provided reminders that governments and life insurers face correlated risks on a large scale in events such as pandemics. In 2004, Swiss Re introduced a mortality based security designed to hedge excessive mortality changes for its life book of business. The concern was apparently brevity risk, i.e., the risk of premature death. Brevity risk can be managed with the standard tools as long as there are no correlated mortality surprises. Such would be the case with a recurrence of the Spanish flu or more generally with the occurrence of a new avian flu. The potential for pandemics introduces correlated risks on a large scale and so the potential for mortality surprises. The brevity risk due to a pandemic is similar to the property risk associated with catastrophic events such as earthquakes and hurricanes and the security used to hedge the risk is similar to a CAT bond (Dubinsky and Laster 2003). To date there have been no similar introductions of mortality based securities to hedge