Annuity Pricing Risk from a Funding Perspective: Quantifying the Impact of Longevity Uncertainty
Document ID: 2006-753 (previously 2006/004)
Published on: 30th June 2006
Author: Craig Turnbull
Writing annuities can be considered as a form of borrowing. This perspective is increasingly being used to consider the economics of annuity pricing – if the borrowing interest rate implied in annuity pricing is lower than the firm’s alternative sources of funding, it may view writing annuities as a an attractive proposition. Of course, the complication in this story is that the borrowing interest rate that is actually experienced from writing an annuity is uncertain: it will depend on the experienced longevity of the annuitants. The Barrie & Hibbert Annuity Model includes a stochastic mortality model that can be used to quantify this uncertainty. This note uses the model to quantify the likely variation in the experienced borrowing rate implicit in writing annuities that arises from the uncertainty in mortality rates.
