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A General Semi-Markov Model for Coupled Lifetimes

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  • Min Ji
  • Rui Zhou

Abstract

Joint-life annuities with a high last survivor benefit play an important role in the optimal annuity portfolio for a retired couple. The dependence between coupled lifetimes is crucial for valuing joint-life annuities. Existing bivariate modeling of coupled lifetimes is based on outdated data with limited observation periods and does not take into account mortality improvement. In this article, we propose a transparent and dynamic framework for modeling coupled lifetime dependence caused by both marital status and common mortality improvement factors. Dependence due to marital status is captured by a semi-Markov joint life model. Dependence due to common mortality improvement, which represents the correlation between mortality improvement patterns of coupled lives, is incorporated by a two-population mortality improvement model. The proposed model is applied to pricing the longevity risk in last survivor annuities sold in the United States and the United Kingdom.

Suggested Citation

  • Min Ji & Rui Zhou, 2019. "A General Semi-Markov Model for Coupled Lifetimes," North American Actuarial Journal, Taylor & Francis Journals, vol. 23(1), pages 98-119, January.
  • Handle: RePEc:taf:uaajxx:v:23:y:2019:i:1:p:98-119
    DOI: 10.1080/10920277.2018.1513370
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