Pricing Model Research Of Longevity Risk Securitization

Since the trend of population aging, longevity risk has become an importantrisk faced by modern endowment insurance system development. Longevity riskrefers to the risk of future pension gap because the person’s actual life is more thanlife expectancy. Longevity population will increase pension payment term andpayment amount from insurance companies or guarantee agencies in the future, leadto the risk that liabilities is more than assets. The pension gap appears and endangerssocial stability. So the government and insurance companies pay more and moreattention to longevity risk, actively looking for longevity risk management methods.Longevity risk securitization is a management means of longevity risk which isdeveloped on the basis of the securitization of insurance risk. It refers to thesecuritization process that the insurance company transfer the longevity risk tocapital markets by longevity bonds issued or longevity swap. Compared withtraditional longevity risk management methods, longevity risk securitization haslower cost, stronger risk bearing ability, and better matching with longevity risk ontime. Longevity risk securitization product offers a new direction for the operation ofthe insurance benefits, also make investors a new way to choose, which can reducethe risk of capital market. The pricing model is the important content of longevityrisk securitization research. Longevity risk pricing is based on the survivalprobability model. The survival probability model gets through the mortality model.Therefore, the research of longevity risk focuses on mortality model predictions.This article will begin from the connotation of longevity risk, and then thepaper will expound the reason of longevity risk, the influence of longevity riskand traditional way of longevity risk management. We will point out the shortage of the traditional method, which raises the management method of longevity risksecuritization. Then we will introduce the meaning of longevity risk securitizationand three types of securitization in detail. We will expound its general form andoperation mechanism. We will mainly introduce the classification and operationmechanism of longevity swaps and analyze their advantages and disadvantages.Finally we will build the pricing model of longevity swaps. Through the tests it isconcluded that the Bayesian MCMC can have better fitting results for populationstatistic data in China.