Single and cross-generation natural hedging of longevity and financial risk∗

The paper provides natural hedging strategies among death ben-efits and annuities written on a single and on different generations, in the presence of both longevity and interest-rate risk. It obtains closed-form Delta and Gamma hedges for cohort-based longevity. We construct hedged portfolios of insurance policies and bonds in an ALM framework. We exploit the correlation between the mortality intensi-ties of different generations and hedge the longevity risk of one cohort with products on other cohorts. An application to UK data on sur-vivorship and bond dynamics shows that hedging is effective, even when rebalancing is infrequent