Pension freedom or trap for the unwary?

(Sep 23, 2016)

An interesting development is the pending right of annuitants to sell their future annuity payments for a cash lump sum, planned for introduction in 2017. The new option will only apply to holders of individual annuity policies with insurers, either from initial purchase of an annuity or because they are holders of individual annuities following a buy-out. The state pension is excluded, as are pensions from a defined-benefit occupational scheme (being covered by a grouped buy-in policy or longevity swap won't change this since these are assets of the pension scheme, not the individual).  There may also be some interesting twists and turns for schemes which have set up their own captive insurer.

This new option…

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Tags: pension freedom, annuities, selection risk, information asymmetry

Countdown to unisex pricing

(Nov 2, 2011)

In just over one year's time, insurers throughout the European Union will be prohibited from using a person's gender to price insurance risks.  This court ruling applies to individual contracts, but not (apparently) to group arrangements.

For insurers it is time to review their pricing bases and systems in good time for December 2012.  Gender has been used as a risk factor in insurance for a very long time: the oldest copy of the Journal of the Institute of Actuaries on my bookshelf shows that actuaries were separately calculating mortality tables by gender at least as far back as 1871.  As a result, it is quite possible that pricing and quotation systems have some subtle oddities, and these will need to be identified…

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Tags: gender, annuities

Recurrent problem

(Aug 28, 2011)

Actuarial work involves calculating the present value of future liabilities.  In the case of pension funds and annuity portfolios, this means valuing future pension payments. This typically involves calculating a lot of annuity factors, often using spreadsheets.

One approach is to calculate the survival curve, then to apply a discount factor to calculate the present value of payments at each age.  Summing these discounted future values gives the annuity factor at the outset age of the survival curve.  However, if annuity factors have to be calculated en masse, it is sometimes much more effective to make use of the recurrence relations between successive annuity factors, as shown in Figure 1.

Figure 1. Recurrence…

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Tags: annuities

Devil in the detail

(Mar 9, 2011)

Last week I wrote about the judgment by the European Court of Justice which bans the use of gender in insurance pricing after 2012.  An interesting aspect is the areas of insurance business which may not be affected.  For example, reinsurance transactions look likely to be out of scope, and some pension-scheme risk-transfer products look to be in a similar situation.  The original text of the 2004 Directive states:

"the use of sex as a factor in the calculation of premiums and benefits for the purposes of insurance and related financial services shall not result in differences in individuals' premiums and benefits."



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Tags: gender, annuities

Gender and annuity pricing in the EU

(Mar 2, 2011)

In a previous post we discussed the possibility of gender being banned throughout the EU as a rating factor for insurance pricing.  This has now come to pass - on 1st March 2011 the European Court of Justice ruled that gender may not be used in insurance pricing according to European law.  So what will happen now?

In the short term, annuity pricing itself will not change.  Insurers can continue to use gender in annuity pricing until 21st December 2012.  After that date, unisex insurance pricing will be in force.  This will lead to all sorts of unintended consequences.

Although pricing will not change in the short term, behaviours will change, possibly quite radically.  Men approaching retirement age with a personal…

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Tags: gender, annuities

Developments in the management of annuity business

(Mar 16, 2010)

Last night an paper on the management of annuities was presented to the Faculty of Actuaries in Edinburgh.  The same paper will be presented again to the Institute of Actuaries on 22nd March in London.

I made some comments during the debate which can be found here.


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Tags: annuities, longevity, postcodes, cause of death

Are annuities expensive enough?

(Jun 8, 2009)

The rationale of any business is to make a profit.  This is usually achieved by selling things for more than they cost to make or supply.  The annuities business is no different: an insurer in the UK will typically charge around 5% more than it expects the annuity to cost.  The twist is that it takes many years to find out how much profit is actually made (or if any profit was made at all).

Of course, mortality is a random process as no-one can say for sure when an annuitant will die.  This means that the profit on an annuity is also a random variable.  Figure 1 shows the probability distribution of the profit on a level annuity payable annually in advance to a male aged 60.

Figure 1. Probability distribution of discounted profit…

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Tags: annuities, profit

Beginner's guide to postcode pricing

(May 15, 2009)

We've created a short graphical summary of the application of postcode-driven lifestyle within actuarial mortality models. It shows how the incorporation of postcode geodemographics as a proxy for socio-economic group can overcome the limitations involved in pricing by benefit size alone.

Feel free to download the postcode pricing information sheet.  It may be used for any purpose you like, as long as it is kept whole and unmodified and the copyright message is unaltered.

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Tags: postcodes, mortality, annuities

How wrong could it be?

(Apr 23, 2009)

We have written previously about the importance of the independence assumption when modelling mortality for annuities and pensions. In a recent presentation to the Royal Statistical Society I showed the audience how life insurers deduplicate their annuity data and how they use postcodes to identify socio-economic status.

When I pointed out the strong link between income, status and multiple policies, a member of the audience asked about the impact of failing to deduplicate. This is an interesting question, since getting mortality assumptions correct for annuity pricing is particularly important due to the great sensitivity of profitability on reserve levels.

We therefore fitted a simple Perks model…

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Tags: deduplication, mortality, annuities, geodemographics, Mosaic

Double trouble

(Jan 22, 2009)

Scientists strongly prefer ideas and processes which have undergone anonymous peer review in published, refereed journals.  At Longevitas we not only use peer-reviewed materials in our work, but we also publish our own research and results in academic papers.  We find it a great discipline, and our work is all the better for it.

One example cropped up recently during anonymous peer-review of a paper we had written.  We had included text on the importance of deduplication, which is essential in statistical work with insured data due to to the existence of people in portfolios with multiple policies.  The scrutineers of our paper accepted the importance of deduplication, but one of them challenged us with the…

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Tags: deduplication, duplicates, annuities

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