| Summary: | The increasing life expectancy trend that is observed at present means that pensioners are increasingly facing the problem of longevity risk (the risk of living longer than one can financially sustain themselves). As a result, there is an increasing demand for annuities, so that the longevity risk can be transferred from the annuitant to the insurer.
In order to price an annuity, the insurer must estimate future liabilities. Liabilities are the obligation to pay out a set amount for each period for as many periods as the annuitant remains alive for. Therefore, an insurer needs to estimate the life expectancy of their annuitants which should first reflect the insurers own mortality experience and secondly, the amount of prudence the insurer chooses to add.
Under Section 4.4 of an insurance company FSA return, they are required to disclose what their expectation of life is. This value differs between insurance companies. This dissertation attempts to discover what factors affect an insurers estimate of life expectancy, and thus explain the variation in the different expectations of life.
The four factors that were tested were the Average Annuity offered by the insurer; the Financial Strength of the insurer; whether or not the insurance company was a mutual or a proprietary and the size of the insurance company, measured by total assets. The findings show that the Financial Strength of the insurer and whether or not the insurance company was a mutual or a proprietary were strongly significant; the size of the insurance company was weakly significant and the Average Annuity was not significant.
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