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Special-Rate Life Annuities: Analysis of Portfolio Risk Profiles

Author

Listed:
  • Ermanno Pitacco

    (Insurance and Risk Management, MIB Trieste School of Management, Largo Caduti di Nasiriya 1, 34142 Trieste, Italy)

  • Daniela Y. Tabakova

    (Insurance and Risk Management, MIB Trieste School of Management, Largo Caduti di Nasiriya 1, 34142 Trieste, Italy)

Abstract

Special-rate life annuities are life annuity products whose single premium is based on a mortality assumption driven (at least to some extent) by the health status of the applicant. The health status is ascertained via an appropriate underwriting step (which explains the alternative expression “underwritten life annuities”). Better annuity rates are then applied in presence of poor health conditions. The worse the health conditions, the smaller the modal age at death (as well as the expected lifetime), but the higher the variance of the lifetime distribution. The latter aspect is due to significant data scarcity as well as to the mix of possible pathologies leading to each specific rating class. A higher degree of (partially unobservable) heterogeneity inside each sub-portfolio of special-rate annuities follows, and this results in a higher variability of the total portfolio payout. The present research aims at analyzing the impact of extending the life annuity portfolio by selling special-rate life annuities. Numerical evaluations have been performed by adopting a deterministic approach as well as a stochastic one, according to diverse assumptions concerning both lifetime distributions and portfolio structure and size. Our achievements witness the possibility of extending the annuity business without taking huge amounts of risk. Hence, the risk management objective “enhancing the company market share” can be pursued without significant worsening of the annuity portfolio risk profile.

Suggested Citation

  • Ermanno Pitacco & Daniela Y. Tabakova, 2022. "Special-Rate Life Annuities: Analysis of Portfolio Risk Profiles," Risks, MDPI, vol. 10(3), pages 1-22, March.
    • Handle: RePEc:gam:jrisks:v:10:y:2022:i:3:p:65-:d:770274
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    References listed on IDEAS

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    1. Nadine Gatzert & Gudrun Schmitt-Hoermann & Hato Schmeiser, 2012. "Optimal Risk Classification with an Application to Substandard Annuities," North American Actuarial Journal, Taylor & Francis Journals, vol. 16(4), pages 462-486.
    2. Annamaria Olivieri & Ermanno Pitacco, 2016. "Frailty and Risk Classification for Life Annuity Portfolios," Risks, MDPI, vol. 4(4), pages 1-23, October.
    3. Hoermann, Gudrun & Ruß, Jochen, 2008. "Enhanced annuities and the impact of individual underwriting on an insurer's profit situation," Insurance: Mathematics and Economics, Elsevier, vol. 43(1), pages 150-157, August.
    4. Nadine Gatzert & Udo Klotzki, 2016. "Enhanced Annuities: Drivers of and Barriers to Supply and Demand," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 41(1), pages 53-77, January.
    5. James Vaupel & Kenneth Manton & Eric Stallard, 1979. "The impact of heterogeneity in individual frailty on the dynamics of mortality," Demography, Springer;Population Association of America (PAA), vol. 16(3), pages 439-454, August.
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    Cited by:

    1. Benjamin Avanzi & Lewis de Felice, 2023. "Optimal Strategies for the Decumulation of Retirement Savings under Differing Appetites for Liquidity and Investment Risks," Papers 2312.14355, arXiv.org, revised Mar 2024.

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