Rafal Chomik and David Rodgers 

This Fact Sheet summarises key insights from the Symposium on Mortality in Australia, held in Melbourne on 13 November 2017 by CEPAR and the Melbourne School of Population and Global Health, including the trends and drivers of mortality change, inequalities in life expectancy, and the potential for future improvements.

Yajing Xu, Michael Sherris and Jonathan Ziveyi

The pricing of longevity-linked securities depends not only on the stochastic uncertainty of the underlying risk factors, but also the attitude of investors towards those factors. In this research, we investigate how to estimate the market risk premium of longevity risk using investable retirement indexes, incorporating uncertain real interest rates using an affine dynamic Nelson-Siegel model. A multi-cohort aggregate, or systematic, continuous time affine mortality model is used where each risk factor is assigned a market price of mortality risk. To calibrate the market price of longevity risk, a common practice is to make use of market prices, such as longevity-linked securities and longevity indices. We use the BlackRock CoRI Retirement Indexes, which provides a daily level of estimated cost of lifetime retirement income for 20 cohorts in the U.S. Although investment in the index directly is not possible, individuals can invest in funds that track the index. For these 20 cohorts, we assume risk premiums for the common factors are the same across cohorts, but the risk premium of the factors for a specific cohort is allowed to take different values for different cohorts. The market prices of longevity risk are then calibrated by matching the risk-neutral model prices with BlackRock CoRI index values. Closed-form expressions and prices for European options on longevity zero-coupon bonds are derived using the model and compared to prices for standard options on zero coupon bonds. The impact of uncertain mortality on long term option prices is quantified and discussed.

Elena Capatina, Michael Keane and Shiko Maruyama

Rafal Chomik and David Rodgers

This Fact Sheet examines some of the most notable ageing indices, their stated purposes, methodologies and results.

Michael Sherris, Yajing Xu and Jonathan Ziveyi.

Shang Wu, Hazel Bateman, Ralph Stevens and Susan Thorp

We investigate whether a life care annuity - the integration of a life annuity with long-term care insurance (LTCI) - can enhance insurance participation to mitigate the economic puzzle of under- insurance in the longevity insurance and LTCI markets. Using an online choice experiment, we elicit individuals' preferences for consumption in different health conditions and their demand for a life care annuity and its health-contingent income feature. We find that on average people prefer to spend more in good health than in bad health. However, those who are more forward looking, have certain cultural backgrounds, and have higher long-term care risk have a stronger preference for consumption in bad health. Results also show that over half of the participants prefer income-indemnity LTCI paying cash benefits than expense-reimbursement insurance. These preferences are mainly driven by the flexibility provided by income-indemnity insurance and by the needs to compensate for informal care. While we find no evidence of selection effects in the purchase decision of life care annuities, we find that individual preferences over the income features of the product could potentially lead to a separating equilibrium of various risk types. We also document other determinants of the demand for life care annuities, including availability of informal care, financial circumstances, awareness of long-term care risk, and product knowledge.

Michael Sherris, Yajing Xu and Jonathan Ziveyi

Multi-country risk management of longevity risk provides new opportunities to hedge mortality and interest rate risks in guaranteed lifetime income streams. This requires consideration of both interest rate and mortality risks in multiple countries. For this purpose, we develop value-based longevity indexes for multiple cohorts in two different countries that take into account the major sources of risks impacting life insurance portfolios, mortality and interest rates. To construct the indexes we propose a cohort-based affine model for multi-country mortality and use an arbitrage-free multi-country Nelson-Siegel model for the dynamics of interest rates. Index based longevity hedging strategies have the advantages of efficiency, liquidity and lower cost but introduce basis risk. Graphical risk metrics are a way to effectively capture the relationship between an insurer’s portfolio and hedging strategies. We illustrate the effectiveness of using a value–based index for longevity risk management between two countries using graphical basis risk metrics. To show the impact of both interest rate and mortality risk we use Australia and UK as domestic and foreign countries, and, to show the impact of mortality only, we use the male populations of the Netherlands and France with common interest rates and basis risk arising only from differences in mortality risks.

Michael P Keane and Ramna Thakur

India has a high level of out-of-pocket (OOP) health care spending, and lacks well developed health insurance markets. As a result, official measures of poverty and inequality that treat medical spending symmetrically with consumption goods can be misleading. We argue that OOP medical costs should be treated as necessary expenses for the treatment of illness, not as part of consumption. Adopting this perspective, we construct poverty and inequality measures for India that account for impoverishment induced by OOP medical costs. For 2011/12 we estimate that 4.1% of the population, or 50 million people, are in a state of “hidden poverty” due to medical expenses. Furthermore, while poverty in India fell substantially from 1999/00 to 2011/12, the fraction of the remaining poverty that is due to medical costs has risen substantially. Economic growth appears less “pro-poor” if one accounts for OOP medical costs, especially since 2004/05, and especially in rural areas.

Jennifer Alonso-García, Hazel Bateman, Johan Bonekamp, and Ralph Stevens

Implied endorsement is considered, together with inertia, as an explanation for the stickiness of defaults. This paper explores whether implied endorsement can serve as an explanation for the stickiness of defaults in the retirement decumulation phase. Using an experimental survey fielded in both the Netherlands and Australia, we analyze whether individuals perceive mandatory minimum withdrawals from their pension wealth set by the government as implicit advice from the government (“government knows best”) or recommendations from peers (“what most people do”). We find that vulnerable groups, such as those with low financial resources and pension capabilities, are more likely to find implied endorsement important. However, those who are overconfident about their capabilities find it less important and are susceptible to adverse choices. As expected, the peer effect is reduced for those with less opportunity to participate in a social network.
 

Susan Thorp, Hazel Bateman, Isabella Dobrescu, Ben R. Newell, and Andreas Ortmann

Simplified disclosures can make comparisons between complex financial products easier, and increase consumer expertise. We use incentivized experiments to investigate whether and to what extent simpler information on fees and investment returns assists retirement plan members to make competent choices.We find that members switch quickly from a high-fee plan to the low-fee alternative when fees are shown in nominal dollars. Showing fees as percentages, however, significantly slows down their transition to a low-fee plan. Complex returns information makes it hard for members to recognize and react to relatively poor investment performance, while simplified information reduces losses considerably.

Jennifer Alonso-García, Hazel Bateman, Johan Bonekamp, Arthur van Soest and Ralph Stevens

Using an online experimental survey, we investigate the importance of rational and psychological motives for saving in retirement for soon to be retired individuals. Our experimental task uses vignettes to elicit the impact of alternative retirement income policy settings comprising combinations of regular income and wealth, and major life events such as becoming frail and/or losing a spouse. Findings indicate that people modify their savings motives where a major life event is expected and the precautionary health savings motive becomes more important if the health of a spouse is expected to deteriorate in the near future. Our experimental survey is fielded in the Netherlands and Australia to allow investigation of the importance of the prevailing institutional settings (annuitized pension wealth in the Netherlands versus flexible drawdowns in Australia). Findings suggest that norms and awareness of the potential risks faced in the actual institutional setting are more important for the ranking of savings motives than the experimental institutional setting for the retirement income provision (income through full annuitization versus flexible withdrawal). This suggests that retirees may be slow to adjust their saving motives and spending patterns following an actual policy shift from flexible drawdowns to annuitization or vice versa.

Robert Holzmann, Jennifer Alonso-García, Heloise Labit-Hardy, and Andrés M. Villegas

Strong and rising empirical evidence across countries finds that longevity is highly heterogeneous in key socioeconomic characteristics, including income. A positive relationship between lifetime income and life expectancy at retirement amounts to a straight tax/subsidy mechanism when the average cohort life expectancy is applied for annuity calculation, as done under nonfinancial defined contribution (NDC) schemes. Such a regressive redistribution and the ensuing labor market distortion put into doubt main features of the NDC scheme and call for alternative benefit designs to compensate for the heterogeneity. This paper explores five key mechanisms of compensation: individualized annuities; individualized contribution rates/account allocations; a two-tier contribution structure with socialized and individual rate structure; and two supplementary approaches under the two-tier approach to deal with the income distribution tails, and the distortions above a ceiling and below a floor. Using unique data from England and Wales and the United States, the analysis indicates that both individualized annuities and a two-tier contribution scheme are feasible and effective and thus promising policy options. To this end, however, a de-pooling of gender will be required.

Ermanno Pitacco

These Lecture Notes aim at introducing technical and financial aspects of the life annuity products, with a special emphasis on the actuarial valuation of life annuity benefits. The text has been planned assuming as target readers:

• advanced undergraduate and graduate students in Economics, Business and Finance;
• advanced undergraduate students in Mathematics and Statistics, possibly aiming at attending, after graduation, actuarial courses at a master level;
• professionals and technicians operating in insurance and pension areas, whose job may regard investments, risk analysis, financial reporting, and so on, hence implying communication with actuarial professionals and managers.