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Annuity-Based Assessment of Uncertainty in Mortality

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  • Juha M. Alho

Abstract

Demographic processes are frequently viewed as slow, especially when compared to the volatility of the economy. Yet, in some applications, demographic shocks appear to have economic consequences. Even mortality has proven to be harder to predict than has been assumed. We review reasons for the difficulty of mortality forecasting, including new proposals. It seems likely that the uncertainty will persist. We propose a comparison of economic and demographic uncertainty, in the context of annuities. In this area of application the two processes have a comparable bearing on risk for both the buyer and the seller. While stock markets are clearly more volatile than average mortality for two or three decades into the future, idiosyncratic uncertainty of mortality is of comparable order of magnitude. Similarly, the much lower aggregate uncertainty of mortality is comparable to the uncertainty of bonds.

Suggested Citation

  • Juha M. Alho, 2008. "Annuity-Based Assessment of Uncertainty in Mortality," Revue économique, Presses de Sciences-Po, vol. 59(5), pages 927-940.
  • Handle: RePEc:cai:recosp:reco_595_0927
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    Cited by:

    1. Ronkainen, Vesa, 2012. "Stochastic modeling of financing longevity risk in pension insurance," Scientific Monographs, Bank of Finland, number 2012_044, November.

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