Standardizing the Giant: Mitigating Longevity Risk in China through Capital Markets Solutions

As the annuity market in China develops, the Chinese insurance industry is increasingly exposed to longevity risk. A large part of the risk is ‘trend risk’, which cannot be diversified by pooling, but may be transferred to capital markets through derivatives that are written on a certain mortality index. In this paper, we first explore different methods to create a standardized mortality index for China. We then study how Chinese insurers may use such an index to offload a meaningful portion of longevity risk from their annuity books. The performance of the proposed index-based longevity hedge is tested by using a multi-population stochastic mortality model that is estimated to data from different provinces, municipalities and autonomous regions of China. Finally, we investigate the amount of capital relief that can be obtained from an index-based longevity hedge under the China Risk Oriented Solvency System (C-ROSS), which is scheduled to be implemented by 2016.