Sense and sensitivity

(Jul 13, 2011)

Annuities are a good example of the cornerstone of actuarial work: discounting future probabilities of payment to allow for the time value of money.  Low interest rates have had major consequences for savers looking for income in retirement, but they are also one reason behind renewed actuarial focus on longevity in recent years.

Simply put, actuaries' interest in mortality and longevity is inversely correlated with the yields obtained on gilts and corporate bonds.  This is illustrated in Figure 1.  The left panel shows how gilt yields have fallen since 1984, while the right panel shows how the cost of an annuity to a male aged 65 increases as the gilt yield falls.  The right panel shows that the fall in yields…

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Tags: Solvency II, longevity risk, longevity shock, gilt yields

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