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Discussion of Extended Logistic Model for Mortality Forecasting and the application of Mortality-Linked Securities by Ya-Wen Hwang Hong- Chih Huang Colin O’Hare Queen’s University Belfast New York September 25, 2009. Agenda. Discussion Paper. Summary Mortality Model Pricing example

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Agenda

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  1. Discussion of Extended Logistic Model for Mortality Forecasting and the application of Mortality-Linked SecuritiesbyYa-Wen HwangHong-Chih HuangColin O’HareQueen’s University BelfastNew YorkSeptember 25, 2009

  2. Agenda Discussion Paper • Summary • Mortality Model • Pricing example • Conclusions

  3. Summary Contributions of the paper: • Extension to the CBD Logistic model • Revisits the Longevity Bond as a means of hedging longevity risk • Creates a 2 tranche LB to counter the over simple EIB bond • Uses the MAPE method to measure the efficiency of the fit and forecast • The main contribution is that the logistic (beta) and logistic (alpha) models are an improvement on the LC and CBD models for forecasting • A secondary contribution is the design of a two tranche longevity bond

  4. Mortality Model Two adjusted logistic models are suggested in this paper • Firstly the logistic (alpha) model with alpha switching values at seg1 • Secondly the logistic (beta) model with beta switching values at seg2 • Finally these are both modified to allow the background death rate to be related to age rather than year

  5. Mortality Model Estimation issues • How to determine seg1 and seg2? Performance measurement • Measured performance using MAPE. • Can you use BIC to measure performance as was used in Cairns et al 2008. How would the logistic models perform then • Fitting has been done using data from 1982 – 2000. what happens if we use more / less data for fitting. Are the forecasting results as good?

  6. Pricing example Pricing example is based on a two tranche longevity bond • Basis risk has been ignored • Flexibility in risk appetite introduced through the two tranches • A cap is introduced such that the liability to the insurer is limited • Different levels of tranche 1 and tranche 2 are tried out to analyse the effects on the premium

  7. Pricing example Net Present Value analysis of the Special Purpose Vehicle • Increasing the premium to the VAR(95) reduced the risk of NPV<0 significantly • Varying the interest rate has a significant impact on the NPV of the Special Purpose Vehicle • Introducing the stochastic nature of interest rates increases the VAR(95) premium • NPV analysis with the stochastic derived premium and coupon values shows a larger risk of NPV<0 even when using the VAR(95) premium

  8. Conclusions Interesting research topic • Addition of a new modified morality model • Analysis of pricing risk for a longevity bond with 2 tranches • Further research needed to test the robustness of the model .

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