Paper: arXiv 2510.18721

Authors: Lydia J. Gabric, Kenneth Q. Zhou

Abstract

Natural hedging allows life insurers to manage longevity risk internally by offsetting the opposite exposures of life insurance and annuity liabilities. Although many studies have proposed natural hedging strategies under different settings, calibration methods, and mortality models, a unified framework for constructing and evaluating such hedges remains undeveloped. While graphical risk assessment has been explored for index-based longevity hedges, no comparable metric exists for natural hedging. This paper proposes a structured natural hedging framework paired with a graphical risk metric for hedge evaluation. The framework integrates valuation, calibration, and evaluation, while the graphical metric provides intuitive insights into residual dependencies and hedge performance. Applied to multiple hedging scenarios, the proposed methods demonstrate flexibility, interpretability, and practical value for longevity risk management.

Complexity vs Empirical Score

  • Math Complexity: 5.5/10
  • Empirical Rigor: 6.0/10
  • Quadrant: Holy Grail — high math complexity, high empirical rigor

Why this score: The paper provides a clear, structured extension to existing longevity risk frameworks by integrating natural hedging with novel graphical assessment tools. It demonstrates solid mathematical formulation of actuarial present values alongside empirical stochastic mortality calibrations and Monte Carlo simulations.

Research Flowchart

  flowchart TD
    A[Research Goal: Develop Unified Natural Hedging Framework & Graphical Metric] --> B[Data Inputs: Life Insurance & Annuity Mortality Liabilities]
    B --> C[Methodology: Integrated Valuation, Calibration & Mortality Modeling]
    C --> D[Computational Process: Construct Hedges & Graphical Risk Assessment]
    D --> E[Outcomes: Improved Risk Evaluation, Residual Dependency Insights & Flexible Hedging]

Cited References (30)

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  7. Canonical Valuation of Mortality-Linked Securities (2011)
  8. Longevity hedge effectiveness: A decomposition (2014)
and 22 more
  1. Longevity hedging 101: A framework for longevity basis risk analysis and hedge effectiveness (2011)
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0 of 30 cited works are in the corpus; resolved via arXiv source bundles, Semantic Scholar and OpenAlex. Corpus-wide: 2518 linked papers.