Heterogeneity of Australian Population Mortality and Implications for a Viable Life Annuity Market

22 Pages Posted: 9 Mar 2011 Last revised: 11 Jan 2018

See all articles by Michael Sherris

Michael Sherris

UNSW Business School

Shu Su

University of New South Wales - School of Actuarial Studies

Date Written: March 6, 2011

Abstract

Heterogeneity in mortality rates is known to exist in populations, undermining the use of age and sex as the only rating factors for life insurance and annuity products. Life insurers underwrite life products using a variety of rating factors to allow for this heterogeneity. In the case of life annuities, there is limited underwriting used. Life insurers rely on an assumption that lives will self select and price the longevity risk with an annuity mortality table that assumes above average longevity. This leads to annuities being less attractive to a wide range of individuals, and limits the ability of private annuity markets to meet longevity risk product needs of a large part of the population. There is an increasing use of rating for life annuity pricing such as impaired annuities and postcode underwriting in the UK. In order to fairly price life annuities and support a broader life annuity market, a better understanding of the extent of heterogeneity in population mortality is required. This paper applies well established frailty models and more recently developed Markov models to quantify the extent of heterogeneity in Australian population mortality. The results confirm significant heterogeneity exists. The impact of heterogeneity on life annuity rates and pension costs provides a compelling case for identifying and quantifying more explicitly the factors that determine mortality heterogeneity, particularly at the older ages, including hereditary, socio-economic, and health factors as well as personal habits.

Keywords: longevity risk, mortality heterogeneity, frailty model, Markov ageing model, physiological age, annuity pricing

JEL Classification: G22, G23, J11, C46

Suggested Citation

Sherris, Michael and Su, Shu, Heterogeneity of Australian Population Mortality and Implications for a Viable Life Annuity Market (March 6, 2011). UNSW Australian School of Business Research Paper No. 2011ACTL05, Available at SSRN: https://ssrn.com/abstract=1779442 or http://dx.doi.org/10.2139/ssrn.1779442

Michael Sherris (Contact Author)

UNSW Business School ( email )

Sydney, NSW 2052
Australia

Shu Su

University of New South Wales - School of Actuarial Studies ( email )

Sydney, NSW 2052
Australia

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