The Hedging Effectiveness of Mortality and Longevity Risks Mitigation

Nurdianti Rizki Hapsari(1*)

(*) Corresponding Author


Hedging is one of alternative method for life insurance companies and annuities providers (pension funds) to manage mortality and longevity risk. Hedging strategy is done by buying a mortality-linked securities from financial intermediaries. The optimal unit of mortality-linked securities that maximize the effectiveness of hedging is derived through the closed form solution of the hedging scheme. Mortality model used in this hedging schemes is Lee-Carter model. Forecasting method of Lee-Carter becomes one of the most well-known and has been successfully applied in many countries to predict the mortality rate of the population. Empirical test was done using Chilean population data. The implementation resulted in a 74% level of hedging effectiveness against mortality risk and 72% to longevity risk.

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