Backtesting Stochastic Mortality Models

Abstract

This study sets out a backtesting framework applicable to the multiperiod-ahead forecasts from stochastic mortality models and uses it to evaluate the forecasting performance of six different stochastic mortality models applied to English & Welsh male mortality data. The models considered are the following: Lee-Carter’s 1992 one-factor model; a version of Renshaw-Haberman’s 2006 extension of the Lee-Carter model to allow for a cohort effect; the age-period-cohort model, which is a simplified version of Renshaw-Haberman; Cairns, Blake, and Dowd’s 2006 two-factor model; and two generalized versions of the last named with an added cohort effect. For the data set used herein, the results from applying this methodology suggest that the models perform adequately by most backtests and that prediction intervals that incorporate parameter uncertainty are wider than those that do not. We also find little difference between the performances of five of the models, but the remaining model shows considerable forecast instability.     

Real Longevity Insurance with a Deductible: Introduction to Advanced-Life Delayed Annuities (ALDA)

Abstract

This paper explores the financial properties of a concept product called an advanced-life delayed annuity (ALDA). The ALDA is a variant of a pure deferred annuity contract that is acquired by installments, adjusted for consumer price inflation, and pays off toward the end of the human life cycle. The ALDA concept is aimed at the growing population of North Americans without access to a traditional defined benefit (DB) pension plan and the implicit longevity insurance that a DB plan contains. I show that under quite reasonable pricing assumptions, a consumer can invest or allocate $1 per month, while saving for retirement, and receive between $20 and $40 per month in benefits, assuming the deductible in this insurance policy is set high enough. The ALDA concept might go a long way in mitigating the psychological barrier to voluntary lump-sum annuitization.     

Technological Innovativeness and Firm Performance in Slovenia and Romania

This study contributes to a better understanding of performance induced by technological innovativeness by developing and testing a model. The model clarifies the nature of the influence of technological innovativeness and its organisational and inter-organisational antecedents (organisational support for innovativeness and technological alliances) on firm growth, profitability and wealth creation. Survey data were collected from firms in two countries: Slovenia and Romania; structural equation modelling was employed to test the model and the hypothesised relationships. Support for most of the model hypotheses was found. Among the control elements in the model, country, industry technological opportunities and firm age were found to be the most influential.     

Pricing Annuity Guarantees Under a Regime-Switching Model

Abstract

We consider the pricing problem of equity-linked annuities and variable annuities under a regimeswitching model when the dynamic of the market value of a reference asset is driven by a generalized geometric Brownian motion model with regime switching. In particular, we assume that regime switching over time according to a continuous-time Markov chain with a finite number state space representing economy states. We use the Esscher transform to determine an equivalent martingale measure for fair valuation in the incomplete market setting. The paper is complemented with some numerical examples to highlight the implications of our model on pricing these guarantees.     

Finite additive utility representations for preferences over menus

I characterize a finite additive utility representation for preferences over menus. The numbers of both positive and negative components in this representation are expressed explicitly in terms of preference. These expressions can be used to characterize models of temptation, perfectionism, context effects, and other phenomena.     

Weighted Pricing Functionals With Applications to Insurance

Abstract

We explore the role of weighted distributions in pricing insurance risks. In particular, we relate the distributions to actuarial and economic premium calculation principles and in this way provide a unifying methodology for constructing new principles and analyzing known ones.