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Annuity Uncertainty with Stochastic Mortality and Interest Rates

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  • Xiaoming Liu

Abstract

Risk analysis in actuarial science has shifted its focus from diversifiable risk to systematic risk in the last 20 years or so. This article contributes further in this direction by proposing the concept of annuity rate to take account of systematic risk inherent in annuity products. The annuity rate is the conditional expectation of the annuity’s future payments, given the future paths of mortality and interest rates. We provide an empirical study to investigate the impact of the two systematic risk factors on the distribution of the annuity rate. In particular, we adopt the Lee-Carter and the Cairns-Blake-Dowd models for mortality risk, and the one-factor and two-factor CIR models for interest risk. Monte Carlo simulation is used to provide numerical illustrations of sensitivity analysis of the annuity rate and of risk assessment of a guaranteed annuity option.

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  • Xiaoming Liu, 2013. "Annuity Uncertainty with Stochastic Mortality and Interest Rates," North American Actuarial Journal, Taylor & Francis Journals, vol. 17(2), pages 136-152.
    • Handle: RePEc:taf:uaajxx:v:17:y:2013:i:2:p:136-152
    DOI: 10.1080/10920277.2013.795481
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    Cited by:

    1. Lee, Hangsuck & Choi, Hyung-Suk & Ha, Hongjun, 2020. "A sharing mechanism of investment outcome for interest-sensitive life insurance products," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    2. Rabitti, Giovanni & Borgonovo, Emanuele, 2020. "Is mortality or interest rate the most important risk in annuity models? A comparison of sensitivity analysis methods," Insurance: Mathematics and Economics, Elsevier, vol. 95(C), pages 48-58.
    3. Benjamin Avanzi & Lewis de Felice, 2023. "Optimal Strategies for the Decumulation of Retirement Savings under Differing Appetites for Liquidity and Investment Risks," Papers 2312.14355, arXiv.org, revised Mar 2024.

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