A Natural Hedging Framework for Longevity Risk with Graphical Risk Assessment

TL;DR

This paper introduces a comprehensive natural hedging framework for longevity risk that combines valuation, calibration, and a novel graphical risk metric to evaluate hedge effectiveness and residual dependencies.

Contribution

It develops a unified structured framework for natural hedging and introduces a graphical risk assessment metric, filling a gap in longevity risk management tools.

Findings

Framework demonstrates flexibility across scenarios

Graphical metric offers intuitive residual dependency insights

Methods show practical value in longevity risk management

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.