Estimating international adverse selection in annuities

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

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A final point to emphasize regarding Table 3 is the degree of statistical significance associated with many of the country-specific effects, with the exception of Chile and Germany. Austria and Israel have 12-13% higher mortality than the benchmark, while Switzerland and Canada have 10% lower mortality. All of the country-specific variables are highly significant when the IRR metric is used, indicating that this metric is more sensitive than the other two measures.

D. Differential Results for Japan

Next we extend our analysis to compare these cross-national results with specific mortality metrics for Japan. Our focus on Japan is partly motivated by the fact that this is the country facing the most rapid aging in the near term. Further, the Japanese government has recently announced that it will soon promulgate regulations favoring a new defined contribution, 401(k)-type pension system, wherein retirees will receive a lump sum that could then be annuitized on a voluntary basis.15 Hence, additional information would be invaluable on the extent to which adverse selection might influence the appeal of annuities in Japan.

To understand the sources of mortality data obtained for Japan, we note that such tables are available for the Japanese population since 1891. Subsequent to World War II, population mortality tables were calculated every five years based on the quinquennial national census supplemented by national birth and death records in the two-- year period centered on the date of the census. The most recent available national mortality table is known as the JLT 18, based on the 1995 census (Ministry of Health and Welfare 1998b).

Using this information, we offer in Figure 3 a comparative graphical illustration of the distribution of expected age at death in the Japanese and U.S. populations. These data reveal that at younger ages, before age 78, a greater proportion of U.S. males is expected to die than of Japanese males; conversely, a higher proportion of Japanese males is expected to die at older ages. As a result, the average age at death for U.S. males is lower than for Japanese men, consistent with lower Japanese mortality rates. Interestingly, the modal age of death is the same in both populations, around 83. Among women, the pattern is similar, although cross-national differences are more marked. Given the essential similarity in the results of the U.S. and U.K. comparison, it is remarkable that Japanese tables are so strikingly different.