The securitization of longevity risk in pension schemes: the case of Italy

This chapter focuses on the securitization of longevity risk in pension schemes through mortality-linked securities. Among the alternative mortality-linked securities proposed in the literature, we considered a longevity bond and a vanilla survivor swap as the most appropriate hedging tools. The analysis refers to the Italian market adopting a Poisson Lee–Carter model to represent the evolution of mortality. We describe the main features of longevity bonds and survivor swaps and the critical issue of the pricing models due to the incompleteness of the mortality securities market and to the lack of a secondary annuity market in Italy, necessary to calibrate the pricing models. For pricing purposes, we refer to the risk neutral approach proposed by Biffis et al. (2005). Finally, we calculate the risk-adjusted market price of a longevity bond with constant fixed coupons and of a vanilla survivor swap