Uncertainty in Pricing and Risk Measurement of Survivor Contracts [PDF] [Github]
Published in Risks, 2025
Longevity risk, the uncertainty about how long retirees will live, poses a challenge for pension funds. If people live longer than expected, these funds can face financial strain. Traditionally, reinsurance has been the go-to solution to transfer this risk. However, there has been a rising interest in using capital markets to manage longevity risk, particularly through financial products like survivor swaps. These contracts allow institutions to share the risk of longevity, but the market is still in its early stages, and there is no clear agreement on the best methods for predicting life expectancy or applying the right pricing models. This project explores the valuation of survivor swaps by using four different models to estimate survival rates, alongside eight premium principles to calculate the fair value of these contracts. Beyond just pricing these instruments, the research introduces a framework for assessing the potential risks involved. As the demand for longevity risk products grows, it is important for financial institutions to understand how to measure possible losses. This will help them allocate capital properly, ensuring they meet regulatory requirements such as those set out by Solvency II. By addressing these challenges, this research aims to contribute to a more stable and effective approach to managing longevity risk.