Heterogeneity of Australian population mortality and implications for a viable life annuity market

Shu Su and Michael Sherris

Insurance: Mathematics and Economics, 2012, vol. 51, issue 2, 322-332

Abstract: Heterogeneity in mortality rates is known to exist in populations, undermining the use of age and sex as the only rating factors for life insurance and annuity products. Life insurers offering life annuities assume that annuitant lives will self-select, and price the longevity risk with an annuity mortality table that assumes above-average longevity. This leads to annuities being less attractive to a wide range of individuals, and limits the viability of private annuity markets. This paper quantifies heterogeneity and its financial implications for annuity prices using well-established frailty models and a more recently developed Markov ageing model calibrated to population mortality data. The heterogeneity implied for each model is quantified using Australian population mortality. The models are compared by considering the distribution of heterogeneity by age implied by the models and the implications for life annuity prices.

Keywords: Longevity risk; Mortality heterogeneity; Frailty model; Markov ageing model; Physiological age; Annuity pricing (search for similar items in EconPapers)
JEL-codes: C46 G22 G23 J11 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:51:y:2012:i:2:p:322-332

DOI: 10.1016/j.insmatheco.2012.05.006

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