The Determinants of Mortality Heterogeneity and Implications for Pricing Underwritten Annuities

36 Pages Posted: 28 Feb 2013

See all articles by Ramona Meyricke

Ramona Meyricke

UNSW Australia Business School, School of Risk & Actuarial Studies; CEPAR, University of New South Wales; Swiss Re, Australia

Michael Sherris

University of New South Wales - ARC Centre of Excellence in Population Ageing Research and School of Risk and Actuarial Studies; UNSW Business School

Date Written: February 21, 2013

Abstract

It is widely accepted that mortality risk varies across individuals within age-sex bands of a population. This heterogeneity exposes insurers to adverse selection if only the healthiest lives purchase annuities, so standard annuities are priced with a mortality table that assumes above-average longevity. This makes standard annuities expensive for many individuals. To address this issue there has been a shift to underwriting annuities in order to offer lower prices to individuals with below-average longevity. While underwriting reduces heterogeneity, mortality risk still varies within each risk class due to unobservable individual-specific factors, referred to as frailty. This paper quantifies the financial impact of frailty on underwritten annuities. The heterogeneity implied by underwriting factors and frailty is quantified by fitting Generalized Linear Mixed Models to longitudinal data for a large sample of US males. The results show that heterogeneity remains after underwriting, creating signi ficant variation in the fair value of underwritten annuities. We develop a method to adjust annuity prices to allow for frailty.

Keywords: mortality heterogeneity, frailty modeling, annuity pricing, longitudinal data, generalized linear mixed models

JEL Classification: G22, G23, C23

Suggested Citation

Meyricke, Ramona and Sherris, Michael, The Determinants of Mortality Heterogeneity and Implications for Pricing Underwritten Annuities (February 21, 2013). UNSW Australian School of Business Research Paper No. 2013ACTL05, Available at SSRN: https://ssrn.com/abstract=2226076 or http://dx.doi.org/10.2139/ssrn.2226076

Ramona Meyricke (Contact Author)

UNSW Australia Business School, School of Risk & Actuarial Studies ( email )

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CEPAR, University of New South Wales ( email )

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Swiss Re, Australia ( email )

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Australia

Michael Sherris

University of New South Wales - ARC Centre of Excellence in Population Ageing Research and School of Risk and Actuarial Studies ( email )

UNSW Business School
Risk and Actuarial Studies
Sydney, NSW 2052
Australia
+61 2 9385 2333 (Phone)
+61 2 9385 1883 (Fax)

HOME PAGE: http://www.asb.unsw.edu.au/schools/Pages/MichaelSherris.aspx

UNSW Business School ( email )

Sydney, NSW 2052
Australia

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