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

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  • Su, Shu
  • Sherris, Michael

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.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:insuma:v:51:y:2012:i:2:p:322-332
    DOI: 10.1016/j.insmatheco.2012.05.006
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    References listed on IDEAS

    as
    1. 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.
    2. 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.
    3. Chris Elbers & Geert Ridder, 1982. "True and Spurious Duration Dependence: The Identifiability of the Proportional Hazard Model," Review of Economic Studies, Oxford University Press, vol. 49(3), pages 403-409.
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    Citations

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    Cited by:

    1. Govorun, Maria & Latouche, Guy & Loisel, St├ęphane, 2015. "Phase-type aging modeling for health dependent costs," Insurance: Mathematics and Economics, Elsevier, vol. 62(C), pages 173-183.
    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. repec:bla:ausecr:v:49:y:2016:i:4:p:483-493 is not listed on IDEAS

    More about this item

    Keywords

    Longevity risk; Mortality heterogeneity; Frailty model; Markov ageing model; Physiological age; Annuity pricing;

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions

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