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Demographic risk in deep-deferred annuity valuation

Published online by Cambridge University Press:  03 April 2017

Min Ji  and
Rui Zhou
Min Ji
Affiliation:
Department of Mathematics, Towson University, Towson, MD, USA
Rui Zhou*
Affiliation:
Warren Centre for Actuarial Studies and Research, University of Manitoba, Winnipeg, MB, Canada R3T 5V4
*
*Correspondence to: Rui Zhou, Warren Centre for Actuarial Studies and Research, University of Manitoba, 181 Freedman Crescent, Winnipeg, MB, Canada R3T 5V4. Tel: (1)204-474-9783; E-mail: rui.zhou@umanitoba.ca
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Abstract

A deep-deferred annuity is a deferred annuity where payments start very late in life, i.e. well after the normal retirement age. This annuity has received much attention lately as it was made accessible to 401(k) plans in the United States in 2014. By transferring the risk of outliving retirement savings at high ages to annuity providers, deep-deferred annuities provide annuitants with enhanced later-life financial security. However, the valuation of this annuity suffers from high uncertainty because the mortality data at high ages are sparse and possibly unreliable. In this paper, we use risk ratio to measure demographic risk in the valuation. Demographic risk is decomposed into the following four components: (1) mortality tail curve risk, (2) mortality improvement model risk, (3) parameter risk in mortality tail curves, and (4) parameter risk in mortality improvement rate models. Our quantitative analysis aims to provide insights into the development and risk management of deep-deferred annuities.

Keywords

High age mortalityMortality improvement rate modelDeep-deferred annuityModel riskParameter risk
Type
Papers
Information
Annals of Actuarial Science , Volume 11 , Issue 2 , September 2017 , pp. 286 - 314
Copyright
© Institute and Faculty of Actuaries 2017 

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