Estimating international adverse selection in annuities

North American Actuarial Journal,  Oct 2002  by Mitchell, Olivia S,  McCarthy, David

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"As an example, insurers in Singapore reportedly use 85% of a dated U.K. Pensioner's mortality table (a(90)) to value their annuity business.

" Mortality tables are not directly affected by the factors listed here because the tables used are based on the experience of actual purchasers of annuities. However, since purchasing behavior is affected by regulation and other factors, these may have an impact on the sample composition. One example is unisex annuities in some countries. If annuities are priced on a unisex basis, more females will find them to be better value, which implies that adverse selection will be lower for females than for males. Another example may be options given to individuals at retirement. If individuals can cash out of a plan instead of buying an annuity, this may induce further adverse selection.

12 We also explored results in which table type is treated as a random effect with non-zero mean and variance , to allow for the possibility that cohort mortality tables may be based on period mortality tables. The null hypothesis that QT = 0 is rejected using a likelihood ratio test, but coefficient estimates are virtually unchanged, so the results reported in the text reflect the simpler error structure; additional details are available from the authors upon request. We also estimated standard errors robust to heteroskedasticity and found these to be less than OLS standard errors; the text reports the more conservative OLS results.

13 The mortality tables from the U.K. are from the Executive Committee of the Continuous Mortality Investigation of the Institute and Faculty of Actuaries (1999) and the Government Actuaries Department of the U.K. (1999); for the U.S. from the U.S. Social Security Administration (1999), Mitchell et al. (1999) and SOA (1999); for Australia from Knox (1999); for Canada from Kim and Sharp (1999); for Chile from Callund (1999); for Israel from Spivak (1999); and for Austria, Germany, and Switzerland from MacDonald (1997). Many of these sources are summarized in James and Vittas (1999).

14 Not all countries have data for all types of tables. Specifically, for the U.S. and Canada we have tables for males, females, population, voluntary annuitants for periods and cohorts, and all combinations of these (a total of 16 tables); for the U.S. we also have the four RP2000 tables for pension annuitants; for the U.K. we have all these for both voluntary and compulsory annuitants (12 tables); and for Australia we have population tables for periods and cohorts, males and females, but voluntary annuitant tables only for periods, males, and females (6 tables). For Israel and Chile we have annuitant and population period tables for males and females (total of 8 tables); for Austria and Germany we have cohort tables for male and female compulsory annuitants but period tables for male and female populations (total of 8 tables); and for Switzerland we have period tables for voluntary and compulsory annuitants, and the population, for males and females (6 tables). In all cases we use the most recent available tables; generally these come from 1997-99, although the tables from German-speaking Europe tend to be slightly older than this. The U.K. tables were based on the 1992 experience but have been adjusted to a 2000 experience by applying the recommended mortality improvement factors. In future work we plan on including older tables to determine how they have changed over time. We only examined tables from age 65 onwards, so our results only apply in this range.