PT - JOURNAL ARTICLE AU - Chris Madsen AU - Martijn Tans AU - Balazs Toth AU - Ing Tai Ching TI - The Quantification of Basis Risk in Synthetic Longevity Transactions DP - 2014 Sep 21 TA - Special Issues PG - 38--45 VI - 2014 IP - 1 4099 - https://pm-research.com/content/2014/1/38.short 4100 - https://pm-research.com/content/2014/1/38.full AB - The topic of basis risk in synthetic longevity transactions (where the hedge is based on a population different from the actual policy portfolio) has been a hotly debated topic. To date, no single standard has been adopted, and both regulators and market participants are increasingly pointing to this as a shortcoming in the development of the longevity risk transfer market. The authors propose a non-model specific method to decompose and quantify basis risk that is firmly grounded in economic principles. It is aligned with Solvency II and could easily be adopted by regulators as a metric for capital determination in index-based transactions. While the method is non-model specific, the authors share an example of an implementation in a stochastic mortality rate environment, in the hopes that this will help to set the stage for how basis risk is quantified in the future.