IDEAS home Printed from https://ideas.repec.org/a/gam/jrisks/v4y2016i4p39-d81388.html
   My bibliography  Save this article

Frailty and Risk Classification for Life Annuity Portfolios

Author

Listed:
  • Annamaria Olivieri

    (Department of Economics, University of Parma, Via J.F. Kennedy 6, 43125 Parma, Italy)

  • Ermanno Pitacco

    (DEAMS ‘B. de Finetti’, University of Trieste, Via dell’Università 1, 34100 Trieste, Italy)

Abstract

Life annuities are attractive mainly for healthy people. In order to expand their business, in recent years, some insurers have started offering higher annuity rates to those whose health conditions are critical. Life annuity portfolios are then supposed to become larger and more heterogeneous. With respect to the insurer’s risk profile, there is a trade-off between portfolio size and heterogeneity that we intend to investigate. In performing this, there is a second and possibly more important issue that we address. In actuarial practice, the different mortality levels of the several risk classes are obtained by applying adjustment coefficients to population mortality rates. Such a choice is not supported by a rigorous model. On the other hand, the heterogeneity of a population with respect to mortality can formally be described with a frailty model. We suggest adopting a frailty model for risk classification. We identify risk groups (or classes) within the population by assigning specific ranges of values to the frailty within each group. The different levels of mortality of the various groups are based on the conditional probability distributions of the frailty. Annuity rates for each class then can be easily justified, and a comprehensive investigation of insurer’s liabilities can be performed.

Suggested Citation

  • Annamaria Olivieri & Ermanno Pitacco, 2016. "Frailty and Risk Classification for Life Annuity Portfolios," Risks, MDPI, vol. 4(4), pages 1-23, October.
    • Handle: RePEc:gam:jrisks:v:4:y:2016:i:4:p:39-:d:81388
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2227-9091/4/4/39/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2227-9091/4/4/39/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Meyricke, Ramona & Sherris, Michael, 2013. "The determinants of mortality heterogeneity and implications for pricing annuities," Insurance: Mathematics and Economics, Elsevier, vol. 53(2), pages 379-387.
    2. A. R. Thatcher, 1999. "The long‐term pattern of adult mortality and the highest attained age," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 162(1), pages 5-43.
    3. X. Lin & Xiaoming Liu, 2007. "Markov Aging Process and Phase-Type Law of Mortality," North American Actuarial Journal, Taylor & Francis Journals, vol. 11(4), pages 92-109.
    4. David Steinsaltz & Kenneth Wachter, 2006. "Understanding Mortality Rate Deceleration and Heterogeneity," Mathematical Population Studies, Taylor & Francis Journals, vol. 13(1), pages 19-37.
    5. Su, Shu & Sherris, Michael, 2012. "Heterogeneity of Australian population mortality and implications for a viable life annuity market," Insurance: Mathematics and Economics, Elsevier, vol. 51(2), pages 322-332.
    6. James Vaupel & Kenneth Manton & Eric Stallard, 1979. "The impact of heterogeneity in individual frailty on the dynamics of mortality," Demography, Springer;Population Association of America (PAA), vol. 16(3), pages 439-454, August.
    7. Pitacco, Ermanno & Denuit, Michel & Haberman, Steven & Olivieri, Annamaria, 2009. "Modelling Longevity Dynamics for Pensions and Annuity Business," OUP Catalogue, Oxford University Press, number 9780199547272.
    8. Anatoli Yashin & Ivan Iachine, 1997. "How frailty models can be used for evaluating longevity limits: Taking advantage of an interdisciplinary approach," Demography, Springer;Population Association of America (PAA), vol. 34(1), pages 31-48, February.
    9. Butt, Zoltan & Haberman, Steven, 2004. "Application of Frailty-Based Mortality Models Using Generalized Linear Models," ASTIN Bulletin, Cambridge University Press, vol. 34(1), pages 175-197, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ermanno Pitacco & Daniela Y. Tabakova, 2022. "Special-Rate Life Annuities: Analysis of Portfolio Risk Profiles," Risks, MDPI, vol. 10(3), pages 1-22, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Pitacco, Ermanno, 2004. "Survival models in a dynamic context: a survey," Insurance: Mathematics and Economics, Elsevier, vol. 35(2), pages 279-298, October.
    2. Meyricke, Ramona & Sherris, Michael, 2013. "The determinants of mortality heterogeneity and implications for pricing annuities," Insurance: Mathematics and Economics, Elsevier, vol. 53(2), pages 379-387.
    3. Jonas Šiaulys & Rokas Puišys, 2022. "Survival with Random Effect," Mathematics, MDPI, vol. 10(7), pages 1-17, March.
    4. Milevsky, Moshe A., 2020. "Calibrating Gompertz in reverse: What is your longevity-risk-adjusted global age?," Insurance: Mathematics and Economics, Elsevier, vol. 92(C), pages 147-161.
    5. Kenneth Manton & Igor Akushevich & Alexander Kulminski, 2008. "Human Mortality at Extreme Ages: Data from the NLTCS and Linked Medicare Records," Mathematical Population Studies, Taylor & Francis Journals, vol. 15(3), pages 137-159.
    6. Maxim S. Finkelstein, 2009. "Understanding the shape of the mixture failure rate (with engineering and demographic applications)," MPIDR Working Papers WP-2009-031, Max Planck Institute for Demographic Research, Rostock, Germany.
    7. Maxim Finkelstein, 2009. "Understanding the shape of the mixture failure rate (with engineering and demographic applications)," Applied Stochastic Models in Business and Industry, John Wiley & Sons, vol. 25(6), pages 643-663, November.
    8. Maxim S. Finkelstein, 2011. "On ordered subpopulations and population mortality at advanced ages," MPIDR Working Papers WP-2011-022, Max Planck Institute for Demographic Research, Rostock, Germany.
    9. Maxim S. Finkelstein & Veronica Esaulova, 2005. "On mixture failure rate ordering," MPIDR Working Papers WP-2005-019, Max Planck Institute for Demographic Research, Rostock, Germany.
    10. Li, Ting & Anderson, James J., 2009. "The vitality model: A way to understand population survival and demographic heterogeneity," Theoretical Population Biology, Elsevier, vol. 76(2), pages 118-131.
    11. Elisabetta Barbi, 2003. "Assessing the rate of ageing of the human population," MPIDR Working Papers WP-2003-008, Max Planck Institute for Demographic Research, Rostock, Germany.
    12. Finkelstein, Maxim, 2012. "On ordered subpopulations and population mortality at advanced ages," Theoretical Population Biology, Elsevier, vol. 81(4), pages 292-299.
    13. Hartemink, Nienke & Missov, Trifon I. & Caswell, Hal, 2017. "Stochasticity, heterogeneity, and variance in longevity in human populations," Theoretical Population Biology, Elsevier, vol. 114(C), pages 107-116.
    14. A. Roger Thatcher & Siu Lan Karen Cheung & Shiro Horiuchi & Jean-Marie Robine, 2010. "The compression of deaths above the mode," Demographic Research, Max Planck Institute for Demographic Research, Rostock, Germany, vol. 22(17), pages 505-538.
    15. M S Finkelstein, 2008. "Reliability modelling for biological ageing," Journal of Risk and Reliability, , vol. 222(1), pages 1-6, March.
    16. Franck Adékambi, 2019. "Moments Of Phase-Type Aging Modeling For Health Dependent Costs," Advances in Decision Sciences, Asia University, Taiwan, vol. 23(2), pages 37-64, June.
    17. Camarda, Carlo Giovanni, 2022. "The curse of the plateau. Measuring confidence in human mortality estimates at extreme ages," Theoretical Population Biology, Elsevier, vol. 144(C), pages 24-36.
    18. Missov, Trifon I. & Finkelstein, Maxim, 2011. "Admissible mixing distributions for a general class of mixture survival models with known asymptotics," Theoretical Population Biology, Elsevier, vol. 80(1), pages 64-70.
    19. Ting Li & James Anderson, 2013. "Shaping human mortality patterns through intrinsic and extrinsic vitality processes," Demographic Research, Max Planck Institute for Demographic Research, Rostock, Germany, vol. 28(12), pages 341-372.
    20. Su, Shu & Sherris, Michael, 2012. "Heterogeneity of Australian population mortality and implications for a viable life annuity market," Insurance: Mathematics and Economics, Elsevier, vol. 51(2), pages 322-332.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jrisks:v:4:y:2016:i:4:p:39-:d:81388. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.