Abstract

This paper develops an economic framework to analyze optimal longevity risk transfers, focusing on the differing risk aversions of buyers and sellers of longevity risk transfer contracts. Utilizing a Stackelberg game framework, we compare static longevity swap contracts, offering long-term protection with constant hedge ratios and predetermined hedging costs, against dynamic contracts, providing short-term coverage with variable contract terms. With real-life mortality data, our quantitative analysis reveals that static contracts are preferred when the buyers are more risk averse as they lead to larger welfare gains for both participating parties and more flexible conditions for market existence. Conversely, dynamic contracts are favored when the buyers are less risk averse. Additionally, information asymmetry is incorporated in the form of ambiguity. While ambiguity reduces welfare gains for both parties and leads to more stringent conditions for market existence, it does not alter the contract preferences. Finally, the implications of our analysis on the optimal contract forms and market existence in both the traditional reinsurance market and the emerging longevity-linked capital market are discussed. Our analysis provides theoretical explanations for several key empirical facts in the current longevity risk transfer market and offers new insights into the development of the longevity-linked capital market.