Pricing q-forward contracts: an evaluation of estimation window and pricing method under different mortality models

The aim of this paper is to study the impact of various sources of uncertainty on the pricing of a special longevity–based instrument: a q-forward contract. At the expiry of a q-forward contract, the realized mortality rate for a given population is exchanged in return for a fixed (mortality) rate that is agreed at the initiation of the contract. Pricing a q-forward involves determining this fixed rate. In our study, we disentangle three main sources of uncertainty and consider their impact on pricing: model choice for the underlying mortality rate, time-window used for estimation and the pricing method itself

Why have exchange-traded catastrophe instruments failed to displace reinsurance?

In spite of the fact that they can draw on a larger, more liquid and more diversiedpool of capital than the equity of reinsurance companies, nancial markets have failedto displace reinsurance as the primary risk-sharing vehicle for natural catastropherisk. We show that this failure can be explained by dierences in information gatheringincentives between nancial markets and reinsurance companies. Using a simple modelof an insurance company that seeks to transfer a fraction of its risk exposure eitherthrough nancial markets or through traditional reinsurance, we nd that the supplyof information by informed traders in nancial markets may be excessive relative to itsvalue for the insurance company, causing reinsurance to be preferred. We show thatwhether traditional reinsurance or nancial markets are ultimately selected dependscrucially on the information acquisition cost structure and on the degree of redundancyin the information produced. Limits on the ability of informed traders to protablytake advantage of their information make the use of nancial markets more likely