Hedging Brevity Risk with Mortality-based Securities

In 2003, Swiss Re introduced a mortality-based security designed to hedge excessive mortality changes for its life book of business. The concern was apparently brevity risk, i.e., the risk of premature death. The brevity risk due to a pandemic is similar to the property risk associated with catastrophic events such as earthquakes and hurricanes and the security used to hedge the risk is similar to a CAT bond. This work looks at the incentives associated with insurance-linked securities. It considers the trade-offs an insurer or reinsurer faces in selecting a hedging strategy. We compare index and indemnity-based hedging as alternative design choices and ask which is capable of creating the greater value for shareholders. Additionally, we model an insurer or reinsurer that is subject to insolvency risk, which creates an incentive problem known as the judgment proof problem. The corporate manager is assumed to act in the interests of shareholders and so the judgment proof problem yields a conflict of interest between shareholders and other stakeholders. Given the fact that hedging may improve the situation, the analysis addresses what type of hedging tool would be best to use. We show that an indemnity-based security tends to worsen the situation, as it introduces an additional incentive problem. Index-based hedging, on the other hand, under certain conditions turns out to be beneficial and therefore clearly dominates indemnity-based strategies. This result is further supported by showing that for the same strike prices the current shareholder value is greater with the index-based security than the indemnity-based security

Select Birth Cohorts

Worldwide demographic changes and their implications for governments, corporations, and individuals have been in the focus of public interest for quite some time due to the fiscal risk related to adequate retirement benefits. Through a more detailed analysis of mortality data an additional type of risk can be identified: differences in mortality improvements by birth year, also known as "cohort effects." Previous contributions have, however, not formalized a suitable measure to further investigate mortality improvements but rather relied on graphical representations without particular focus on individual cohorts but groups of the overall population. No criterion to identify single birth year cohorts as select has been established. A simple criterion for identifying select cohorts is proposed and used here to what country mortality data reveals about the mortality and longevity experience of cohorts. Select cohorts are rare but can be quite different from surrounding cohorts and so may generate financial risks that need to be hedged naturally or artificially with new ART instruments

Select Birth Cohorts

Worldwide demographic changes and their implications for governments, corporations, and individuals have been in the focus of public interest for quite some time due to the fiscal risk related to adequate retirement benefits. Through a more detailed analysis of mortality data an additional type of risk can be identified: differences in mortality improvements by birth year, also known as "cohort effects." Previous contributions have, however, not formalized a suitable measure to further investigate mortality improvements but rather relied on graphical representations without particular focus on individual cohorts but groups of the overall population. No criterion to identify single birth year cohorts as select has been established. A simple criterion for identifying select cohorts is proposed and used here to what country mortality data reveals about the mortality and longevity experience of cohorts. Select cohorts are rare but can be quite different from surrounding cohorts and so may generate financial risks that need to be hedged naturally or artificially with new ART instruments.mortality improvement; longevity trend; select cohort; longevity risk

Hedging Brevity Risk with Mortality-based Securities

In 2003, Swiss Re introduced a mortality-based security designed to hedge excessive mortality changes for its life book of business. The concern was apparently brevity risk, i.e., the risk of premature death. The brevity risk due to a pandemic is similar to the property risk associated with catastrophic events such as earthquakes and hurricanes and the security used to hedge the risk is similar to a CAT bond. This work looks at the incentives associated with insurance-linked securities. It considers the trade-offs an insurer or reinsurer faces in selecting a hedging strategy. We compare index and indemnity-based hedging as alternative design choices and ask which is capable of creating the greater value for shareholders. Additionally, we model an insurer or reinsurer that is subject to insolvency risk, which creates an incentive problem known as the judgment proof problem. The corporate manager is assumed to act in the interests of shareholders and so the judgment proof problem yields a conflict of interest between shareholders and other stakeholders. Given the fact that hedging may improve the situation, the analysis addresses what type of hedging tool would be best to use. We show that an indemnity-based security tends to worsen the situation, as it introduces an additional incentive problem. Index-based hedging, on the other hand, under certain conditions turns out to be beneficial and therefore clearly dominates indemnity-based strategies. This result is further supported by showing that for the same strike prices the current shareholder value is greater with the index-based security than the indemnity-based security.alternative risk transfer; insurance; default risk

Constraining the IMF using TeV gamma ray absorption

Gamma rays of ~TeV energies from distant sources suffer attenuation due to pair production off of ~1 micron EBL photons. We may exploit this process in order to indirectly measure the EBL and constrain models of galaxy formation. Here, using semi-analytic models of galaxy formation, we examine how gamma ray absorption may be used as an indirect probe of the stellar initial mass function (IMF), although there is a degeneracy with dust modeling. We point out that with the new generation of gamma ray telescopes including STACEE, MAGIC, HESS, VERITAS, and Milagro, we should soon possess a wealth of new data and a new method for probing the nature of the IMF.Comment: contribution to "TeV Astrophysics of Extragalactic Sources" VERITAS workshop, editors M. Catanese, J. Quinn, T. Weekes; 3 pages 1 figur

From arteries to boreholes: Steady-state response of a poroelastic cylinder to fluid injection

The radially outward flow of fluid into a porous medium occurs in many practical problems, from transport across vascular walls to the pressurisation of boreholes. As the driving pressure becomes non-negligible relative to the stiffness of the solid structure, the poromechanical coupling between the fluid and the solid has an increasingly strong impact on the flow. For very large pressures or very soft materials, as is the case for hydraulic fracturing and arterial flows, this coupling can lead to large deformations and, hence, to strong deviations from a classical, linear-poroelastic response. Here, we study this problem by analysing the steady-state response of a poroelastic cylinder to fluid injection. We consider the qualitative and quantitative impacts of kinematic and constitutive nonlinearity, highlighting the strong impact of deformation-dependent permeability. We show that the wall thickness (thick vs. thin) and the outer boundary condition (free vs. constrained) play a central role in controlling the mechanics

Impact of pressure dissipation on fluid injection into layered aquifers

Carbon dioxide (CO2) capture and subsurface storage is one method for reducing anthropogenic CO2 emissions to mitigate climate change. It is well known that large-scale fluid injection into the subsurface leads to a buildup in pressure that gradually spreads and dissipates through lateral and vertical migration of water. This dissipation can have an important feedback on the shape of the CO2 plume during injection, and the impact of vertical pressure dissipation, in particular, remains poorly understood. Here, we investigate the impact of lateral and vertical pressure dissipation on the injection of CO2 into a layered aquifer system. We develop a compressible, two-phase model that couples pressure dissipation to the propagation of a CO2 gravity current. We show that our vertically integrated, sharp-interface model is capable of efficiently and accurately capturing water migration in a layered aquifer system with an arbitrary number of aquifers. We identify two limiting cases --- `no leakage' and `strong leakage' --- in which we derive analytical expressions for the water pressure field for the corresponding single-phase injection problem. We demonstrate that pressure dissipation acts to suppress the formation of an advancing CO2 tongue during injection, resulting in a plume with a reduced lateral extent. The properties of the seals and the number of aquifers determine the strength of pressure dissipation and subsequent coupling with the CO2 plume. The impact of pressure dissipation on the shape of the CO2 plume is likely to be important for storage efficiency and security

Detecting the Attenuation of Blazar Gamma-ray Emission by Extragalactic Background Light with GLAST

Gamma rays with energy above 10 GeV interact with optical-UV photons resulting in pair production. Therefore, a large sample of high redshift sources of these gamma rays can be used to probe the extragalactic background starlight (EBL) by examining the redshift dependence of the attenuation of the flux above 10 GeV. GLAST, the next generation high-energy gamma-ray telescope, will have the unique capability to detect thousands of gamma-ray blazars to redshifts of at least z=4, with sufficient angular resolution to allow identification of a large fraction of their optical counterparts. By combining established models of the gamma-ray blazar luminosity function, two different calculations of the high energy gamma-ray opacity due to EBL absorption, and the expected GLAST instrument performance to produce simulated fluxes and redshifts for the blazars that GLAST would detect, we demonstrate that these gamma-ray blazars have the potential to be a highly effective probe of the optical-UV EBL.Comment: 15 pages, AASTeX, 3 eps figures, accepted for publication in Ap

Fluid-driven deformation of a soft granular material

Compressing a porous, fluid-filled material will drive the interstitial fluid out of the pore space, as when squeezing water out of a kitchen sponge. Inversely, injecting fluid into a porous material can deform the solid structure, as when fracturing a shale for natural gas recovery. These poromechanical interactions play an important role in geological and biological systems across a wide range of scales, from the propagation of magma through the Earth's mantle to the transport of fluid through living cells and tissues. The theory of poroelasticity has been largely successful in modeling poromechanical behavior in relatively simple systems, but this continuum theory is fundamentally limited by our understanding of the pore-scale interactions between the fluid and the solid, and these problems are notoriously difficult to study in a laboratory setting. Here, we present a high-resolution measurement of injection-driven poromechanical deformation in a system with granular microsctructure: We inject fluid into a dense, confined monolayer of soft particles and use particle tracking to reveal the dynamics of the multi-scale deformation field. We find that a continuum model based on poroelasticity theory captures certain macroscopic features of the deformation, but the particle-scale deformation field exhibits dramatic departures from smooth, continuum behavior. We observe particle-scale rearrangement and hysteresis, as well as petal-like mesoscale structures that are connected to material failure through spiral shear banding