Discussion of Extended Logistic Model for Mortality Forecasting and the application of Mortality- Linked Securities by Ya-Wen Hwang Hong-Chih Huang Colin O’Hare Queen’s University Belfast New York September 25, 2009

Agenda 1)Summary 2)Mortality Model 3)Pricing example 4)Conclusions Discussion Paper

Summary Contributions of the paper: Extension to the CBD Logistic model Revisits the Longevity Bond as a means of hedging longevity risk Creates a 2 tranche LB to counter the over simple EIB bond Uses the MAPE method to measure the efficiency of the fit and forecast The main contribution is that the logistic (beta) and logistic (alpha) models are an improvement on the LC and CBD models for forecasting A secondary contribution is the design of a two tranche longevity bond

Mortality Model Two adjusted logistic models are suggested in this paper Firstly the logistic (alpha) model with alpha switching values at seg1 Secondly the logistic (beta) model with beta switching values at seg2 Finally these are both modified to allow the background death rate to be related to age rather than year

Mortality Model Estimation issues How to determine seg1 and seg2? Performance measurement Measured performance using MAPE. Can you use BIC to measure performance as was used in Cairns et al How would the logistic models perform then Fitting has been done using data from 1982 – what happens if we use more / less data for fitting. Are the forecasting results as good?

Pricing example Pricing example is based on a two tranche longevity bond Basis risk has been ignored Flexibility in risk appetite introduced through the two tranches A cap is introduced such that the liability to the insurer is limited Different levels of tranche 1 and tranche 2 are tried out to analyse the effects on the premium

Pricing example Net Present Value analysis of the Special Purpose Vehicle Increasing the premium to the VAR(95) reduced the risk of NPV<0 significantly Varying the interest rate has a significant impact on the NPV of the Special Purpose Vehicle Introducing the stochastic nature of interest rates increases the VAR(95) premium NPV analysis with the stochastic derived premium and coupon values shows a larger risk of NPV<0 even when using the VAR(95) premium

Conclusions Interesting research topic Addition of a new modified morality model Analysis of pricing risk for a longevity bond with 2 tranches Further research needed to test the robustness of the model.