Contract structure and risk aversion in longevity risk transfers

This paper develops an economic framework for optimal longevity risk transfer between a buyer and a seller with different risk aversions. We compare static (long-dated, pre-committed) and dynamic (short-dated, rolled) longevity swaps in a Stackelberg game. We find that static contracts are preferred when the buyer is more risk averse, while dynamic contracts are preferred when the seller is more risk averse. For the capital-market setting, we extend the benchmark by introducing seller-side ambiguity about the mortality distribution and robust max-min valuation. Even moderate ambiguity can eliminate the market for static swaps, while dynamic designs remain viable. We then extend the analysis to index-based swaps with basis risk: relative to indemnity swaps, optimal loadings are lower and gains are smaller for both parties, though the static-dynamic preference pattern is unchanged.

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Publication Details

Journal
Insurance Mathematics and Economics
Published
2026-04-25
DOI
https://doi.org/10.1016/j.insmatheco.2026.103251
Primary Topic
Insurance, Mortality, Demography, Risk Management
Type
article
Field-Weighted Citation Impact
0.00

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article

Contract structure and risk aversion in longevity risk transfers

Insurance Mathematics and Economics
Insurance, Mortality, Demography, Risk Management
article

Contract structure and risk aversion in longevity risk transfers

article en

Abstract

This paper develops an economic framework for optimal longevity risk transfer between a buyer and a seller with different risk aversions. We compare static (long-dated, pre-committed) and dynamic (short-dated, rolled) longevity swaps in a Stackelberg game. We find that static contracts are preferred when the buyer is more risk averse, while dynamic contracts are preferred when the seller is more risk averse. For the capital-market setting, we extend the benchmark by introducing seller-side ambiguity about the mortality distribution and robust max-min valuation. Even moderate ambiguity can eliminate the market for static swaps, while dynamic designs remain viable. We then extend the analysis to index-based swaps with basis risk: relative to indemnity swaps, optimal loadings are lower and gains are smaller for both parties, though the static-dynamic preference pattern is unchanged.

Insurance Mathematics and EconomicsVol. 128
University of Waterloo (CA), Monash University (AU)
Natural Sciences and Engineering Research Council of Canada
Openalex Percentile: Top 12%
Insurance, Mortality, Demography, Risk Management
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