For many years the longevity risk of individuals has been underestimated as survival probabilities improved across the developed world. The uncertainty and volatility of future longevity has posed significant risk issues for both individuals and product providers of annuities and pensions. This...

This paper assesses the hedge effectiveness of an index-based longevity swap and a longevity cap for a life annuity portfolio. Although longevity swaps are a natural instrument for hedging longevity risk, derivatives with non-linear pay-offs, such as longevity caps, provide more effective...