### A basis point

#### (Jun 7, 2011)

In an earlier post I mentioned the advent of survivor forwards, or S-forwards, a derivative contract which could be used for hedging pension liabilities.  Survivor forwards appeared again in another post illustrating the financial impact of model risk.

A survivor forward defined on an index of, say, population mortality will give a large data set with considerable history on which to base a projection model.  However, a natural question is to ask how suitable such a contract would be for hedging pension or annuitant liabilities?  Figure 1 shows the Kaplan-Meier survival curve from age 70 for male annuitants born in 1928, together with the corresponding survival curve for males in England & Wales.

Figure…

### Caveat emptor

#### (Apr 13, 2011)

I wrote earlier about survivor forwards as a means of transferring longevity risk.  One natural question for investors to ask is: what is the likelihood of loss exceeding a given amount?  The only sensible means of answering this question is to use a stochastic projection model - a deterministic model generates scenarios, but without attaching probabilities it cannot be used to approach this problem.

Consider an example where Party A (a pension scheme, say) offers a survivor forward based on males in England and Wales.  Party A offers to pay a fixed rate of 0.47 per £10 million nominal for survivors between age 60 and 85.  The investor, Party B, is asked to pay the floating leg, i.e. the actual survival rate, S. …

### Forward thinking

#### (Nov 10, 2010)

A forward contract is an agreement between two parties to buy or sell an asset at a specified price at a date in the future. It is typically a private arrangement used by one or both parties to manage their risk, or where one party wishes to speculate.

A new innovation is the idea of a survivor forward, or S-forward, which is based on the concept of the survival curve. The two parties will agree on what the neutral or best-estimate survival probability will be to a certain age, and the actual survival probability will determine who pays whom and how much. If the two parties do not agree on a neutral survival probability, one may pay the other a premium. Since the future survival curve involves considerable uncertainty,…