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Basis (or baseline) risk

\ˈbeɪsəs\ \rɪsk\

When calculating the longevity for a given population, this is the risk of how much the given population differs from the population used to calculate the baseline longevity assumption.

This risk is reduced by using a rating factor model to model baseline longevity as participants of the pension plan are compared to participants of the reference population with similar characteristics to them as defined by the available ratings factors. Basis risk will tend to reduce with more rating factors (up to a point) and with a larger reference population. Pension plans exhibiting a strong industry effect, are exposed to more basis risk.

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