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

  • Su, Shu
  • Sherris, Michael
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    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.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0167668712000674
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    Article provided by Elsevier in its journal Insurance: Mathematics and Economics.

    Volume (Year): 51 (2012)
    Issue (Month): 2 ()
    Pages: 322-332

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    Handle: RePEc:eee:insuma:v:51:y:2012:i:2:p:322-332
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505554

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    1. Elbers, Chris & Ridder, Geert, 1982. "True and Spurious Duration Dependence: The Identifiability of the Proportional Hazard Model," Review of Economic Studies, Wiley Blackwell, vol. 49(3), pages 403-09, July.
    2. Daniel Alai & Michael Sherris, 2012. "Rethinking Age-Period-Cohort Mortality Trend Models," Working Papers 201212, ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales.
    3. James Vaupel & Kenneth Manton & Eric Stallard, 1979. "The impact of heterogeneity in individual frailty on the dynamics of mortality," Demography, Springer, vol. 16(3), pages 439-454, August.
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