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Impact of Outlier-Adjusted Lee–Carter Model on the Valuation of Life Annuities

In: Advances in Econometrics, Operational Research, Data Science and Actuarial Studies

Author

Listed:
  • Cem Yavrum

    (Institute of Applied Mathematics, Actuarial Sciences, Middle East Technical University)

  • A. Sevtap Selcuk-Kestel

    (Institute of Applied Mathematics, Actuarial Sciences, Middle East Technical University)

Abstract

Annuity pricing is critical to the insurance companies for their financial liabilities. Companies aim to adjust the prices using a forecasting model that fits best to their historical data, which may have outliers influencing the model. Environmental conditions and extraordinary events such as a weak health system, an outbreak of war, and occurrence of pandemics like Spanish flu or Covid-19 may cause outliers resulting in misevaluation of mortality rates. These outliers should be taken into account to preserve the financial strength and liability of the life insurance industry. In this study, we aim to determine if there is an impact of mortality jumps in annuity pricing. We question the annuity price fluctuations among different countries and two models on country characteristics. Moreover, we show the annuity pricing on a portfolio for a more comprehensive assessment. To achieve this, a simulated diverse portfolio is created for the prices of four types of life annuities. Canada, Japan, and the United Kingdom as developed countries with high longevity risk, Russia and Bulgaria as emerging countries are considered. The results of this study prove the use of outlier-adjusted models for specific countries.

Suggested Citation

  • Cem Yavrum & A. Sevtap Selcuk-Kestel, 2022. "Impact of Outlier-Adjusted Lee–Carter Model on the Valuation of Life Annuities," Contributions to Economics, in: M. Kenan Terzioğlu (ed.), Advances in Econometrics, Operational Research, Data Science and Actuarial Studies, pages 495-513, Springer.
    • Handle: RePEc:spr:conchp:978-3-030-85254-2_30
    DOI: 10.1007/978-3-030-85254-2_30
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