Assurance companies face two main risk factors in the process of pricing annuity products namely the interest risk and the longevity risk. There are numerous products and possibilities for the insurers to hedge their interest risk using interest derivatives and long bonds. Hedging products against the longevity risk is uncommon but insurers have to take it into account when they are pricing their annuity products.
There are two types of longevity risks. On the one hand the idiosyncratic longevity risk and on the other hand the systematic longevity risk. With regards to the idiosyncratic longevity risk, individuals are faced with the issue that they need to invest in assets for their retirement in spite of an uncertain span of lifetime and thus an uncertain investment horizon. Pricing of life annuities could be done according to corresponding mortality tables. If the clients of an insurer die on average according to mortality rates provided by such tables, the revenues of the insurer should be sufficient to ensure the payments for the clients who are still alive. The issue out of a pension fund perspective is that longevity has been improving over time and clients could live longer than anticipated. These improvements occurred in an unpredictable way, especially at higher ages according to Cairns et al. (2006). Insurers therefore made false calculations of the insurance premium and suffered losses due to pensioners living longer than anticipated.
The systematic longevity risk is based on the stochastic variation of mortality. The future development of life expectancy will be highly unpredictable due to medical improvements or discoveries in genetic research. For that reason insurers need stochastic models to quantify the systematic mortality changes over time and to make a prediction about future mortality in order to prevent losses caused by longevity risk.
This paper will firstly discuss the literature regarding the Lee and Carter one factor model and the relevance of longevity risk for annuity pricing. Second this paper aims to estimate the stochastic two-factor model by Cairns, Blake and Dowd (2006) (CBD) for U.S. males from 1933 to 2010 by running a simulation to predict average mortality for the year 2030. In the further course will this stated prediction be used to price an annuity product followed by a brief conclusion and summary of results.
Inhaltsverzeichnis (Table of Contents)
- 1 Introduction
- 2 Literature Review
- 3 Model Implementation
- 3.1 Estimation of A_1 and A_2
- 3.2 Prediction of A_1 and A_2
- 3.3 Predicted Mortality Rates for 2030
- 3.4 Pricing of an Immediate Pension Annuity
- 4 Conclusion
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This seminar paper aims to model and predict future mortality rates and their impact on the pricing of immediate pension annuities from a pension fund perspective. The analysis utilizes existing mortality models and data to forecast future mortality trends.
- Modeling mortality rates
- Predicting future mortality trends
- Impact of longevity risk on pension annuity pricing
- Application of statistical models to actuarial science
- Financial implications for pension funds
Zusammenfassung der Kapitel (Chapter Summaries)
1 Introduction: This chapter likely introduces the topic of longevity risk and its significance for pension funds. It sets the stage for the research by outlining the problem of increasing life expectancies and their financial implications for pension providers. It will probably also introduce the methodology and structure of the paper.
2 Literature Review: This section will review existing literature on longevity risk modeling, focusing on relevant studies and methodologies used to predict mortality rates and assess the financial impact on pension schemes. It sets the context by summarizing past work in the field and highlighting the gap the present research aims to fill.
3 Model Implementation: This chapter is the core of the paper. It details the specific model used for predicting mortality rates, likely describing the mathematical methods employed. The estimation and prediction of key parameters (A_1 and A_2) are likely explained in detail, along with how these are used to calculate predicted mortality rates for 2030. Finally, this chapter will explain the application of the model to price an immediate pension annuity, considering the predicted mortality trends. This section would demonstrate the practical application of the model.
Schlüsselwörter (Keywords)
Longevity risk, mortality rates, pension funds, annuity pricing, actuarial science, model implementation, prediction, forecasting.
Frequently Asked Questions: Comprehensive Language Preview
What is the main topic of this seminar paper?
This seminar paper focuses on modeling and predicting future mortality rates and their impact on the pricing of immediate pension annuities from a pension fund perspective. It utilizes existing mortality models and data to forecast future mortality trends and assess the financial implications for pension funds.
What are the key themes explored in the paper?
The key themes include modeling mortality rates, predicting future mortality trends, the impact of longevity risk on pension annuity pricing, the application of statistical models to actuarial science, and the financial implications for pension funds.
What does the Table of Contents include?
The table of contents covers an introduction, a literature review, model implementation (including estimation and prediction of parameters A_1 and A_2, predicted mortality rates for 2030, and pricing of an immediate pension annuity), and a conclusion.
What is the purpose of the Literature Review chapter?
The literature review chapter examines existing research on longevity risk modeling, focusing on methodologies used to predict mortality rates and their financial impact on pension schemes. It aims to establish the context of the current research and highlight any gaps in existing knowledge.
What is the focus of the Model Implementation chapter?
The core of the paper, the model implementation chapter, details the specific model used to predict mortality rates, explaining the mathematical methods, estimation and prediction of parameters (A_1 and A_2), calculation of predicted mortality rates for 2030, and the application of the model to price an immediate pension annuity.
What are the key parameters used in the model?
The model uses parameters A_1 and A_2, which are estimated and predicted within the model implementation chapter. The details of their estimation and prediction, as well as how they impact mortality rate predictions and annuity pricing, are explained in that section.
What is the time horizon for the mortality rate predictions?
The model predicts mortality rates for the year 2030.
What type of annuity is considered in the pricing example?
The paper focuses on the pricing of an immediate pension annuity.
What are the key words associated with this research?
Key words include longevity risk, mortality rates, pension funds, annuity pricing, actuarial science, model implementation, prediction, and forecasting.
What is the overall goal of the research?
The overall goal is to provide a model for predicting future mortality rates and to demonstrate the impact of these predictions on the pricing of immediate pension annuities, offering valuable insights for pension fund management.
- Quote paper
- Lasse Erdweg (Author), 2015, Longevity Risk from a Pension Fund Perspective, Munich, GRIN Verlag, https://www.grin.com/document/310639
