The Reciprocal Generalized Inverse Gaussian Frailty with Application in Life Annuity Business
Journal of Advances in Mathematics and Computer Science,
Aims: As shown in literature, several authors have adopted various individual frailty mixing distributions as a way of dealing with possible heterogeneity due to unobserved covariates in a group of insurers. This research contribution is to generalize the frailty mixing distribution to nest other classes of frailty distributions not in literature and apply the proposed distributions in valuation of life annuity business.
Methodology: A simulation study is done to assess the performance of the aforementioned models. The baseline parameters is estimated using Bayesian Inference and a better model is suggested for valuation of life annuity business.
Results: As a result of generalizing the frailty some new classes of frailty distributions are constructed such as; the Reciprocal Inverse Gaussian Frailty, the Inverse Gamma Frailty, the Harmonic Frailty and the Positive Hyperbolic Frailty.
From the simulation study, the proposed new frailty models shows that ignoring frailty leads to an underestimation of future residual lifetime since the survival curve shifts to the right when heterogeneity is accounted for. This is consistent with frailty literature.
The Reciprocal Inverse Gaussian model closely represents the Association of Kenya Insurers graduated rates with a slight increase in survival due to longevity risk.
Conclusion: The proposed new frailty models show an increase in the insurers expected liability when unobserved heterogeneity is accounted for. This is consistent with frailty literature and thus can be applied to avoid underestimating the insurer’s liability in the context of life annuity business.
The RIG model as proposed in estimating future liability by directly adjusting the AKI mortality rates shows an increase in longevity risk. The extent of heterogeneity of the insured group determines the level of risk. The RIG frailties should be considered for multivariate cases where the insureds are clustered in groups.
- Frailty model
- generalized inverse Gaussian distribution
- eciprocal inverse Gaussian distribution
- harmonic distribution
- positive hyperbolic distribution
- Bayesian inference
- life annuity insurance.
How to Cite
Shu Su, Michael Sherris. Heterogeneity of Australian population mortality and implications for a viable life annuity market; 2011.
Ramona M, Michael S. The determinants of mortality heterogeneity and implications for pricing annuities insurance: Mathematics and economics. 2013;53:379–387.
Annamaria Olivieri, Ermanno Pitacco. Frailty and risk classification for life annuity portfolios; 2016.
Pitacco E. Heterogeneity in mortality: A survey with an actuarial focus; 2018.
Benjamin Avanzi, Claudia Gagné, Vincent Tu. Is Gamma frailty a good model? Evidence from Canadian Pension Funds Australian School of Business Research Paper No. 2015ACTL15.
Nadine Gatzert, Gudrun Schmitt-Hoermann, Hato Schmeiser. Optimal risk classification with application to substandard annuities; 2013.
Eriksson F, Scheike T. Additive Gamma frailty models with applications to competing risks in related individuals. Biometrics in Press; 2015.
Rocha CS. Survival models for heterogeneity using the non-central chi-squared distribution with zero degrees of freedom. Lifetime Data, Models in Reliability and Survival Analysis. 1994;275-279.
Hougaard P. Analysis of multivariate survival data. Springer Science and Business Media, New York; 2000.
Sichel HS. On a distribution representing sentence length in written prose. JR Stat Ser A. 1974;137:25-34.
Joelle H. Fong. Beyond age and sex: Enhancing annuity pricing. The Geneva Risk and Insurance Review. 2015;40:133–170.
Dodd E, Forster J, Bijak J, Peter Smith. Smoothing mortality data: The English Life Tables, 2010–2012; 2018.
Abstract View: 444 times
PDF Download: 263 times