What's Wrong with Annuity Markets?

We show that the supply of life annuities in the U.S. is constrained by interest rate risk. We identify this effect using annuity prices offered by U.S. life insurers from 1989 to 2019 and exogenous variations in contract-level regulatory capital requirements. The cost of interest rate risk management accounts for at least half of the average life annuity markups or eight per- centage points. The contribution of interest rate risk to annuity markups sharply increased after the great financial crisis, suggesting new retirees' opportunities to transfer their longevity risk are unlikely to improve in a persistently low interest rate environment.

Coherent Mortality Model in A State-Space Approach

Mortality improvements that have recently become apparent in most developing countries have significantly shaped queries on forecast divergent between populations in recent years. Therefore, to ensure a more coherent way of forecasting, previous researchers have proposed multi-population mortality model in the form of independent estimation procedures. However, similar to single-population mortality model, such independent approaches might lead to inaccurate prediction interval. As a result of this inaccurate mortality forecasts, the life expectancies and the life annuities that the mortality model aims to generate is underestimated. In this study, we propose another new extension of the multi-population mortality model in a joint estimation approach by recasting the model into a state-space framework. A combination of augmented Li-Lee and O’Hare-Li methods are employed, before we transform the proposed model into a state-space formulation. In addition, this study incorporates the quadratic age effect parameter to the proposed model to better capture the younger ages mortality. We apply the method to gender and age-specific data for Malaysia. The results show that our latter framework brings a significant contribution to the multi-population mortality model due to the incorporation of joint-estimate and quadratic age effect parameters into the model’s structure. Consequently, the proposed model improves the mortality forecast accuracy.

Mandatory annuitization and money's worth: evidence from Singapore

This paper examines the impact of uncertainties in the future trends of mortality on annuity values in Singapore's compulsory purchase market. We document persistent population mortality improvement trends over the past few decades, which underscores the importance of longevity risk in this market. Using the money's worth framework, we find that the life annuities delivered expected payouts valued at 1.019–1.185 (0.973–1.170) per dollar of annuity premium for males (females). Even in a low mortality improvement scenario, the annuities provide an expected value exceeding 0.950. This suggests that participants in the national annuity pool have access to attractively priced annuities, regardless of sex, product, and premium invested.

Valuation of long-term care options embedded in life annuities

In most industrialised countries, one of the major societal challenges is the demographic change coming along with the ageing of the population. The increasing life expectancy observed over the last decades underlines the importance to find ways to appropriately cover the financial needs of the elderly. A particular issue arises in the area of health, where sufficient care must be provided to a growing number of dependent elderly in need of long-term care (LTC) services. In many markets, the offering of life insurance products incorporating care options and LTC insurance products is generally scarce. In our research, we therefore examine a life annuity product with an embedded care option potentially providing additional financial support to dependent persons. To evaluate the care option, we determine the minimum price that the annuity provider requires and the policyholder’s willingness to pay for the care option. For the latter, we employ individual utility functions taking account of the policyholder’s condition. We base our numerical study on recently developed transition probability data from Switzerland. Our findings give new and realistic insights into the nature and the utility of life annuity products proposing an embedded care option for tackling the financing of LTC needs.

Analysis of Mortality Improvement on the Pension Cost Due to Aging Population

Aging is a good indicator in demographic and health areas as the lifespanof the elderly population increases. Based on the government’s Economic Outlook 2019,it was found that an aging population would increase the government pension paymentsas the pensioners and their beneficiaries have longer life expectancy. Due to mortalityrates decreasing over time, the life expectancy tends to increase in the future. Theaims of this study are to forecast the mortality rates in the years 2020 and 2025 usingthe Heligman-Pollard model and then analyse the effect of mortality improvement onthe pension cost (annuity factor) for the Malaysian population. However, this studyonly focuses on estimating the annuity factor using life annuities through the forecastedmortality rates. The findings indicated that the pension cost is expected to increase ifthe life expectancy of the Malaysian population increases due to the aging population inthe near future. Thus, to reduce pension costs and help the pensioners from insufficientfinancial income, the government needs to consider an extension of the retirement age infuture.

Analytic expressions for annuities based on Makeham–Beard mortality laws

This note derives analytic expressions for annuities based on a class of parametric mortality “laws” (the so-called Makeham–Beard family) that includes a logistic form that models a decelerating increase in mortality rates at the higher ages. Such models have been shown to provide a better fit to pensioner and annuitant mortality data than those that include an exponential increase. The expressions derived for evaluating single life and joint life annuities for the Makeham–Beard family of mortality laws use the Gauss hypergeometric function and Appell function of the first kind, respectively.