Using Life Settlements to Hedge the Mortality Risk of Life

Submitted on 29th July 2015

Life settlements have attracted increasing attentions of investors and scholars. This paper extends the literature by conducting the first analysis of life settlements as a hedging vehicle for life insurers. We employ real-case data from Coventry to calibrate the parameters of the mortality rate models and consider the variations of the deviations from life expectancy. We further propose a new approach to construct an optimal hedging strategy with regard to certain risk measures. Our numerical results show that life settlements can be an effective hedging tool to significantly reduce the insurers mortality risk. The results are robust across risk measures, correlation specifications, and mortality rate models.


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College of Commerce, Taiwan,
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Jennifer L. Wang, Ming-Hua Hsieh, Chenghsien Tsai
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