On the Distribution of Life Annuities with Stochastic Interest Rates

36 Pages Posted: 12 Jan 2006

See all articles by Tom Hoedemakers

Tom Hoedemakers

KU Leuven - Faculty of Business and Economics (FEB)

Grzegorz Darkiewicz

KU Leuven - Faculty of Business and Economics (FEB)

Marc Goovaerts

Catholic University of Leuven (KUL) - Department of Economics

Abstract

In the traditional approach to life contingencies only decrements are assumed to be stochastic. In this contribution we consider the distribution of a life annuity (and a portfolio of life annuities) when also the stochastic nature of interest rates is taken into account. Although the literature concerning this topic is already quite rich, the authors usually restrict themselves to the computation of the first two or three moments. However, if one wants to determine e.g. capital requirements using more sofisticated risk measures like Value-at-Risk or Tail Value-at-Risk, more detailed knowledge about underlying distributions is required. For this purpose, we propose to use the theory of comonotonic risks developed in Dhaene et al. (2002a and 2002b), which has to be slightly adjusted to the case of scalar products. This methodology allows to obtain reliable approximations of the underlying distribution functions, in particular very accurate estimates of upper quantiles and stop-loss premiums. Several numerical illustrations confirm the very high accuracy of the methodology.

Keywords: Life annuities, Stochastic interest rates, Comonotonicity, Stop-loss premiums

Suggested Citation

Hoedemakers, Tom and Darkiewicz, Grzegorz and Goovaerts, Marc, On the Distribution of Life Annuities with Stochastic Interest Rates. Available at SSRN: https://ssrn.com/abstract=875310 or http://dx.doi.org/10.2139/ssrn.875310

Tom Hoedemakers (Contact Author)

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Grzegorz Darkiewicz

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Marc Goovaerts

Catholic University of Leuven (KUL) - Department of Economics ( email )

Leuven, B-3000
Belgium
+32 0 16 32 7446 (Phone)
+32 0 16 32 3740 (Fax)

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