Valuations of Mortality-Linked Structured Products

Abstract

Medical advances have extended the average lifespan and seem poised to eliminate, or at least substantially moderate, death rates from major diseases like AIDS and cancer. But at the same time they have introduced major “longevity risk” for life insurers and issuers of annuity products. One way this exposure can be managed is by issuing structured debt securities in which the investor bears some of the risk. In this article, Yueh, Chiu, and Tsai review several basic structures in which either the coupon or the principal repayment depends on the realized value of a mortality index. They develop valuation models for mortality calls and puts, and explore the sensitivity to changes in parameter values.