A Simple Approach to Project Extreme Old Age Mortality Rates and Value Mortality-Related Financial Instruments

Pensions Institute Discussion Paper, PI-1907, December 2019

7 Pages Posted: 16 Mar 2020

See all articles by Kevin Dowd

Kevin Dowd

Durham Business School

Andrew J. G. Cairns

Heriot-Watt University - Department of Actuarial Science & Statistics

David P. Blake

City, University of London

Date Written: December 1, 2019

Abstract

This article shows how mortality models that involve age effects can be fitted to ages beyond the sample range using projections of age effects as replacements for age effects that might not be in the sample. This ‘projected age effect’ approach allows insurers to use age-effect mortality models to obtain valuations of financial instruments such as annuities that depend on projections of extreme old age 𝑞 rates. Illustrative results suggest that the proposed approach provides a good approximation to both 𝑞 rates and term annuity prices. The practical import of this approach is to allow insurers to apply a much wider range of mortality models to such problems than would otherwise be possible.

Keywords: Age-Period-Cohort mortality model, age effect, projection, extreme old age, term annuity

JEL Classification: G220, G230, J110

Suggested Citation

Dowd, Kevin and Cairns, Andrew J. G. and Blake, David P., A Simple Approach to Project Extreme Old Age Mortality Rates and Value Mortality-Related Financial Instruments (December 1, 2019). Pensions Institute Discussion Paper, PI-1907, December 2019 , Available at SSRN: https://ssrn.com/abstract=3552230 or http://dx.doi.org/10.2139/ssrn.3552230

Kevin Dowd

Durham Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

Andrew J. G. Cairns

Heriot-Watt University - Department of Actuarial Science & Statistics ( email )

Edinburgh, Scotland EH14 4AS
United Kingdom

David P. Blake (Contact Author)

City, University of London ( email )

106 Bunhill Row
London, EC1Y 8TZX
Great Britain
+44 (0) 20-7040-8600 (Phone)
+44 (0) 20-7040-8881 (Fax)

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