Macquarie University has been appointed by the Life & Longevity Markets Association (LLMA) to lead a project on assessing basis risk for longevity transactions.
The project, headed up by the LLMA and the Institute and Faculty of Actuaries (IFoA), is entering its second phase. This includes developing a readily-applicable methodology for quantifying the basis risk arising from the use of population-based mortality indices for managing longevity risk.
Such indices are often used in pension benefits and annuitant liabilities as well as providing actuaries with key data.
Phase one was completed at the end of 2014 which included examining longevity basis risk. This led to the development of a methodology that could be used to measure longevity basis risk. This work will be put into practice in phase two.
Macquarie University will be supported by University of Waterloo, Australian National University and Mercer Australia, to develop the longevity-related methodology.
IFoA president-elect Colin Wilson said: "Managing longevity risk is a major concern for pension funds and life insurance companies, and the practical application of assessing basis risk will be useful to many in the industry."
Macquarie University associate professor Jackie Li said: "Increasing life expectancy poses a significant challenge to insurers, pension plan sponsors, and governments. It is of utmost importance to find theoretically sound and also practically feasible approaches to manage longevity risk. In particular, the use of population-based mortality indices has great potential to deal with this risk but the problem of the existence of basis risk remains unsolved."
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