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Actuarial work involves calculating the present value of future liabilities. In the case of pension funds and annuity portfolios, this means valuing future pension payments. This typically involves calculating a lot of annuity factors, often using spreadsheets.
Risk and models under Solvency II
Insurers need to have internal models for their major risks. Indeed, both the Individual Capital Assessment (ICA) regime in the UK and the pending Solvency II rules in the EU demand that insurers have good models for their risks.
Everything counts in large amounts
Models for projecting mortality are typically built using information on lives with deaths by age and gender. However, this ignores an important risk factor for longevity, namely socio-economic group. For annuity and pension reserving, therefore, it would be helpful to use such information when building stochastic projection models.
Summary judgement
In previous posts we have looked at problems with the quality and reliability of cause-of-death data and a list of hurdles for mortality projections based on such data. One other issue is that of detail.
Sense and sensitivity
Annuities are a good example of the cornerstone of actuarial work: discounting future probabilities of payment to allow for the time value of money. Low interest rates have had major consequences for savers looking for income in retirement, but they are also one reason behind renewed actuarial focus on longevity in recent years.
Tail wags dog
Last week we looked at the odd situation whereby longevity risk is regulated more strictly in an insurance-company annuity portfolio than in a company pension scheme. One argument for the different treatment is that the sponsoring employer is a source of ongoing financial support for the scheme.
Solvency II for pensions?
Casual readers could be forgiven for thinking that pensions and annuities have a lot in common, and that they should therefore be regulated in a similar manner. After all, both annuity portfolios and pension schemes are exposed to a host of similar risks, such as increased longevity.
How not to do postcode profiling
We have written extensively about how to use postcodes for mortality modelling. The best approach in the UK is to use so-called geodemographic profilers, which map postcodes to relatively homogeneous groups of households sharing certain socio-economic characteristics.
A basis point
In an earlier post I mentioned the advent of survivor forwards, or S-forwards, a derivative contract which could be used for hedging pension liabilities.
Between the lines
Actuaries make great use of so-called standard tables. These are annual probabilities at each whole age for males and females. However, often mortality rates are required at ages which are not whole numbers.