Annuitization and aggregate mortality risk

Abstract

It is well established that annuities can fully diversify idiosyncratic mortality risks. However, survival rates at the cohort level are changing, raising the question what is the scope of annuities in the presence of aggregate mortality risk? In an overlapping generations setting, we show that risk free annuities exist, but offer a return below the (fair) certainty equivalent return, and agents do not fully annuitize their savings. Higher aggregate mortality risk increases savings and thus the mean level of the capital stock. This lowers the mean rate of return on capital, the survival premium on annuities and the share of individual savings in annuities.

Forecasting Mortality Trend of Indonesian Old Aged Population with Bayesian Method

“…Therefore, we choose the exponential function, which also maintains the monotonicity property to guarantee the ease of interpretation. We express α, β, and ϛ as in ( 3), (4), and (5).…”

“…Second, some parties may consider that overall degrees of freedom is smaller than pooling both sexes into a model. Therefore, we construct the pooled model by modifying (3), (4), and (5). Assuming that the estimate of trend parameters are equal for both males and females, our expressions for the value of α, β, and ϛ in the pooled model are expressed as ( 9), (10), and (11) with adding a sex indicator denoted by s, with the value of 1 for males and 0 for females.…”

“…Insurance companies need to set appropriate risk charges to keep being profitable. The mortality risk charge compensates the insurer for any losses as a result of the death of the policyholder [3]- [5] and affecting insurer's surplus [6]- [11]. While longevity risk exposes insurance companies to the chance that they have greater-than-anticipated cash flow needs on pension funds [12]- [15] and even those who were involved with longevity risk in Europe and North America started to increase their participation in the longevity risk transfer market rapidly [16].…”

Mandatory annuitization and money's worth: evidence from Singapore

“…The authors quantified the importance of cohort mortality risk using the Lee and Carter (1992) model and then assessed its consequences on the money's worth (MW) distribution of annuity values. In relation, recent theoretical study by Andersen and Gestsson (2021) showed that aggregate mortality risk affects the scope for annuitization in that agents do not fully annuitize their savings in an overlapping generations setting, which underscores the role of aggregate mortality risk in annuity markets.…”