Designing And Pricing Longevity Bond Based On The Aggregate Longevity Risk

In recent decades, the descending population mortality is an uaual phenomenon among countries. Aggregate longevity risk reflects in two aspects:one aspect refers to the risk of government’s and firm’s burden aggravating with the extending life span; the other aspect is the general debility risk of financial instruments resulted of descending mortality outstriping the predetermined.Longevity risk has various forms in different fields. Our research aims at hedging the longevity risk of life insurance. Using financial engineering methods, the paper designs an instrument to hedge longevity risk:longevity bond, which transfers the risk to the vast capital market. Main research tasks has been conducted as follows:Part one:on the basis of field research and the study on vast related literatures both domestic and overseas, while summarizing the sorts and mechanisms of various longevity bonds, the paper introduces the first longevity bond:EIP/BNP bonds, and details its designing methods and defects. After that, the paper analyses the cash flows of life insurance company which conducts both life insurance business and longevity bonds, and build the designing framework of longevity bonds, balancing the longevity bond profit and the loss of life insurance business.Part two:establish the pricing model of longevity bond. First, the paper uses Lee-Carter mortality model to fit and forecast China’s population mortality, and build survival index. Second, considering that the longevity market is not complete, the paper adjusts the cashflow distribution which is relevant to the survival index by Wang transfer model. Third, the paper uses GARCH model to fit and forecast China’s short-term interest rates, and calculates the discount factor, based on which the paper deduces the pricing model.Part three:design an example of longevity bond based on the pricing model. The paper calculates longevity bond’s price using China’s mortality data, analyses the sensitivity of the parameters, and draw an conclusion of hedging effects.To sum up, the paper focuses on the longevity risk in life insurance, design a longevity bond which can hedge the risk on capital markets. The empirical analysis indicates that the longevity bond can hedge the risk effectively. At last, the paper discusses China’s building longevity financial market and gives some suggestions, in order to better improve and supplement the existing endowment system.