Annuity Market Research Articles

Artificial Intelligence in Life Expectancy Prediction: A Paradigm Shift for Annuity Pricing and Risk Management

This article explores the transformative potential of artificial intelligence (AI) in predicting life expectancy and its far-reaching implications for the annuities market. Traditional actuarial models, often reliant on demographic data and historical trends, face limitations in accuracy and personalization. We present a novel approach leveraging machine learning algorithms, including neural networks, decision trees, and ensemble methods, alongside natural language processing and deep learning techniques. Our AI-driven models integrate diverse data sources, including medical histories, genetic information, lifestyle factors, and socio-economic indicators, to provide more accurate and individualized life expectancy predictions. Using a dataset of anonymized health records and historical mortality data, we demonstrate that our AI models significantly outperform traditional actuarial tables in predicting individual mortality risks. The enhanced predictive power of these models has substantial implications for the annuities market, enabling insurers to price products more precisely, manage longevity risk more effectively, and optimize reserve capital. Moreover, consumers benefit from fairer pricing and personalized product offerings. This article underscores the need for regulatory framework revisions to accommodate AI-driven methodologies in actuarial practices. We also discuss ethical considerations, data privacy concerns, and the challenge of model interpretability, highlighting areas for future research to ensure responsible deployment of AI in life expectancy predictions and annuity pricing

Optimal annuitization under stochastic interest rates

Abstract The decision about when and how much to annuitize is an important element of the retirement planning of most individuals. Optimal annuitization strategies depend on the individual’s exposure to annuity risk, meaning the possibility of meeting unfavorable personal and market conditions at the time of the annuitization decision. This article studies optimal annuitization strategies within a life-cycle consumption and portfolio choice model, focusing on stochastic interest rates as an important source of annuity risk. Closing a gap in the existing literature, our numerical results across different model variants reveal several typical structural effects of interest rate risk on the annuitization decision, which may however vary depending on preference specifications and alternative investment opportunities: When allowing for gradual annuitization, annuity risk is temporally diversified by spreading annuity purchases over the whole pre-retirement period, with annuity market participation starting earlier in the life cycle and becoming more extensive with increasing interest rate risk. Ruling out this temporal diversification possibility, as embedded in many institutional settings, incurs significant welfare losses, which are increasing with higher interest rate risk, together with larger overall demand for annuitization.

Optimal strategies for the decumulation of retirement savings under differing appetites for liquidity and investment risks

AbstractA retiree’s appetite for risk is a common input into the lifetime utility models that are traditionally used to find optimal strategies for the decumulation of retirement savings. In this work, we consider a retiree with potentially differing appetites for the key financial risks of decumulation: liquidity risk and investment risk. We set out to determine whether these differing risk appetites have a significant impact on the retiree’s optimal choice of decumulation strategy. To do so, we design and implement a framework which selects the optimal decumulation strategy from a general set of admissible strategies in line with a retiree’s goals, and under differing appetites for the key risks of decumulation. Overall, we find significant evidence to suggest that a retiree’s differing appetites for different decumulation risks will impact their optimal choice of strategy at retirement. Through an illustrative example calibrated to the Australian context, we find results which are consistent with actual behaviours in this jurisdiction (in particular, a shallow market for annuities), which lends support to our framework and may provide some new insight into the so-called annuity puzzle.

Pricing longevity bond with affine-jump-diffusion multi-cohort mortality model

Facing increasingly severe longevity problems, traditional longevity risk management methods are no longer the final answer. Longevity risk securitization provides a good hedging method, which transfers the longevity risks to a wider capital market and realizes the cross-market transfer of risks. The pricing process of longevity derivatives depends on the underlying risk factors (stochastic processes of mortality and interest rate). We adopt an affine-jump-diffusion process to model the dynamics of mortality and estimate the model parameters with the actual mortality data in China. The measure implied by the annuity market price is chosen as the risk-neutral pricing measure. We use the Chinese annuity market price to calculate the concrete form of the measure transformation and use the risk-neutral pricing measure thereby to price the longevity bond designed by Denuit et al. (2007).

What’s Wrong with Annuity Markets?

Abstract We show that the supply of U.S. life annuities is constrained by interest rate risk. We identify this effect using annuity prices offered by life insurers from 1989 to 2019 and exogenous variations in contract-level regulatory capital requirements. The cost of interest rate risk management—conditional on the effect of adverse selection—accounts for about half of annuity markups, or 8 percentage points. The contribution of interest rate risk to annuity markups sharply increased after the Global Financial Crisis, suggesting new retirees’ opportunities to transfer their longevity risk are unlikely to improve in a persistently low interest rate environment.

What is the value of the annuity market?

What is the value of the annuity market?

Optimal Investment Policy for Pension Annuitants in Malaysia under Economic Exposure

This research has conducted a profound evaluation into the annuity market in Malaysia from both the business and individual perspective. To a great extent, analysis is made on how the annuity insurers could better maintain the solvency level of annuity fund which is exposed under significant economic risks by obtaining an optimal fund allocation to maximise investment returns through the development of Asset-Liability Management (ALM). By adapting the concept from Wilkie model, six fundamental models including inflation rate, real interest rate, KLCI stock return, KLCI stock dividend yield, 10-year MGS return as well as Malaysian property return were formulated accordingly to the Box-Jenkins modelling approach. It concludes that the optimal weightages combination suggests that the annuity insurers should allocate 94% of the single premium such as RM100,000 which collected from the annuitant to bond market, whereas the other 5% of the fund should be invested in stock but only 1% of the premium should be allocated into the property investment.

Can transparency increase adverse selection? Evidence from an electronic platform for annuities

We show that the introduction of an electronic platform in the Chilean annuity market with the objectives of bringing transparency and enhancing competition also exacerbated adverse selection. The longevity gap between male annuitants and non-annuitants increased around 24 months.

Severity reduction and private market distortion effects of voluntary and mandatory public annuity plans

AbstractMany economies have recently adopted the defined-contribution retirement financing system, but one disadvantage of this system is that retirees have to bear longevity risk. As a result, several economies have also introduced the public annuity plans. We analyze the similarities and differences between voluntary public annuity with ceiling (VPAc) plan and mandatory public annuity with flexibility (MPAf) plan that are empirically observed. Introducing either plan reduces the severity of adverse selection in public annuities, but further distorts the private annuity market. These two plans have systematically different effects on retirees’ utility levels: the good health group is adversely affected and the average health group benefits. On the other hand, the poor health group benefits from the VPAc plan but may be adversely affected under the MPAf plan.

Valuing Lifetime Withdrawal Guarantees in RILAs

In recent years, registered index-linked annuities (RILAs) have reinvigorated the equity-linked annuities market in the United States. Now insurers are beginning to add lifetime withdrawal guarantees (GLWBs) to these products. GLWBs have been well studied in the context of traditional variable annuities, where they are infamous for the risk exposure they create on insurers’ balance sheets. In this study, we present a simple pricing model for GLWBs embedded in RILA policies and offer an extensive numerical illustration that quantifies their pricing and risk exposure for various RILA contracts. We find that a GLWB rider—unlike for fixed index annuities—exposes RILA carriers to considerable long-term financial risks, comparable to a variable annuity account with a heavily reduced equity exposure (∼40%).

Gender-based price discrimination in the annuity market: Evidence from Chile

This paper provides the first evidence for discriminatory behaviour against female consumers in the annuity market. It focuses on Chile, where an electronic bidding system allows retirees to receive offers, simultaneously from several firms in the market for the same standardised annuity product. By exploiting within-individual variation in initial offers across firms, this analysis shows that firms with market power offer more unfairly priced annuities to women than to men. This result is driven by highly rated firms. Gender differences in financial literacy can explain why firms find it profitable to offer higher prices to women.

Conflicting Interests and the Effect of Fiduciary Duty: Evidence from Variable Annuities

Abstract We examine the variable annuity market to study conflicts of interest and the effect of fiduciary duty in brokerage markets. Insurers typically pay brokers higher commissions for selling more expensive annuities. Our results indicate that sales are four times as sensitive to brokers’ interests as to investors’. To limit conflicts of interest, the Department of Labor proposed a rule in 2016 holding brokers to a fiduciary standard. We find that after the proposal, sales of high-expense products fell by 52$\%$ as sales became more sensitive to expenses. Based on our structural estimates, investor welfare improved overall. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Analyzing the Selection Effect in the Private Korean Annuity Market

The purpose of this study is to investigate the degree of adverse selection in the Korean individual annuity market using the money’s worth calculations. The insurers’ pricing of different annuity products reflects individual’s self-selection into products based on private information about their mortality prospects. Using payments offered for different products, money’s worth calculations were higher for younger and male annuitants, annuity with a bigger premium size and longer guarantee period, frontloaded (as opposed to level) annuity, joint (as opposed to single) annuity, tax-qualified (as opposed to non-tax-qualified) annuity, and deferred (as opposed to immediate) annuity. In a cross-country analysis, we observe that the cost of adverse selection is higher in countries with more generous social security income.

Gender-Based Price Discrimination in the Annuity Market: Evidence from Chile

This paper studies gender-based price discrimination in the annuity market. The dataset consists of transaction-level data on the universe of individuals accessing the Chilean annuity market in the 2004-2017 period. It exploits the fact that, in Chile, individuals can access the annuity market through three different channels: an independent financial advisor, a sales agent at a company, or directly at a PFA (Pension Fund Administrator). The analysis shows that sales agents severely distort prices to the detriment of women customers. Women who consult sales agents pay higher transaction prices compared to the other two groups of women, while there is no variation in men’s prices across the three channels for market access. Additional evidence shows that this is not driven by differences in negotiation skills or type of annuity product purchased but rather by differences in initial prices. Firms charge higher initial prices to women who access the market through one of their sales agents. These results are consistent with an explanation that links the lack of competition between firms to discriminatory behaviour against female customers. Gender differences in financial literacy might explain why firms find it profitable to offer higher prices to women.

What is the Value of the Annuity Market?

What is the Value of the Annuity Market?

Feasibility assessment of longevity swap for the Korean life annuity market

Feasibility assessment of longevity swap for the Korean life annuity market

What's Wrong with Annuity Markets?

<ns3:p>We show that the supply of life annuities in the U.S. is constrained by interest rate risk. We identify this effect using annuity prices offered by U.S. life insurers from 1989 to 2019 and exogenous variations in contract-level regulatory capital requirements. The cost of interest rate risk management accounts for at least half of the average life annuity markups or eight per- centage points. The contribution of interest rate risk to annuity markups sharply increased after the great financial crisis, suggesting new retirees' opportunities to transfer their longevity risk are unlikely to improve in a persistently low interest rate environment.</ns3:p>

Population Structure and Consumption Growth: Evidence from National Transfer Accounts

We assess the impact of population structure on economic growth. Following recent research, we focus on the generational turnover as a key driver of consumption growth. We characterize the impact of the average birth and death rates on the generational turnover, depending on the age-profile of consumption and on the extent of annuity market imperfection. Using recent data from the National Transfer Accounts on consumption profiles for a number of countries, we assess in a comparative way the sign and magnitude of generational turnover and its impact on consumption growth. We find considerable cross-country variation and trace it back to differences in demographic rates and in the consumption structure.

The Economics of a Secondary Market for Variable Annuities

This article demonstrates that a secondary market for U.S. variable annuity policies may be immediately welfare enhancing to all parties involved: the insurer, the original policyholder, and a third-party investor. Our model reflects relevant market frictions—here, the product’s tax benefits—that produce differing valuation perspectives for the three parties. This allows for policy transfers that benefit all parties simultaneously, including the insurance company, irrespective of the level of control that it exerts over this secondary market. We illustrate our insights first with a theoretical two-period model, followed by an empirically motivated numerical analysis. Our numerical results suggest a best-estimate total welfare gain of 2.6% of the initial investment amount under the optimal secondary market structure.

What's Wrong with Annuity Markets?

The annuity market in the US has been historically small. What drives this fact? The annuity market could be small because of adverse selection or supply-side frictions in insurance markets. Identifying demand- and supply-side frictions is difficult without data separately measuring exogenous shocks and endogenous responses. In this paper, we provide a novel identification using annuity price data and regulatory capital requirements. Using publicly available data, we document a robust relationship between shocks originating in the corporate bond market and annuity price markups. We show that this relationship supports a standard model of adverse selection with an incomplete bond market.