Mortality options: the point of view of an insurer (Q2656991)

The authors consider a life insurer in a discrete time framework who is able to buy a securitization product to hedge mortality. Two cohorts are considered: one underlying the securitization product and one for the portfolio of the insurer. In a general setting, the authors show that there exists a unique strategy that maximizes the insurer's expected utility from terminal wealth. Numerical illustrations of the approach are demonstrated in the context of a Gompertz-Makeham model, where the realized survival probabilities can fluctuate moderately within an \(\epsilon\)-corridor, as well as in the context of a toy model for mortality shocks. In both examples the insurer can hedge longevity risk by trading in a survival bond.