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Working Papers

Pensioners enjoying retirement

Ermanno Pitacco

Heterogeneity of a population in respect of mortality is due to differences among the individuals, which are caused by various risk factors. Some risk factors are observable while others are unobservable. The set of observable risk factors clearly depends on the type of population addressed. The impact of observable risk factors on individual mortality, in particular when they also constitute “rating factors” in the calculation of premiums and other actuarial values, is usually expressed approximately, according to some pragmatic approach. For example, additive or multiplicative adjustments to the average age-specific mortality are frequently adopted. Heterogeneity due to unobservable risk factors can conversely be quantified by adopting the concept of individual “frailty”. However, individual frailty can be interpreted and consequently modeled in several ways, according to the causes which are considered as originating the frailty itself: congenital characteristics, environmental features, lifestyle aspects, etc. It follows that the individual frailty can, in particular, be assumed either constant or variable throughout the lifetime.

Keywords: Heterogeneity, Frailty, Risk factors, Force of mortality, Mortality laws, Parametric models, Special-rate annuities.

Financial independence

Natasha Ginnivan, Rafal Chomik, John Piggott, Tony Butler and Adrienne Withall

The Australian prisoner population has experienced a dramatic increase in the number of older inmates over the past decade. Modelling presented in this paper shows that these trends are likely to continue over the next decade and that they will result in higher health costs of prisons under different imprisonment scenarios. Taking into consideration the continued rise of incarceration rates, our calculations show that health costs of prisoners could increase by anywhere between 17% to 90% depending on whether the increase of older prisoners continues as it has in the last decade. Policy responses have been slow so far. We suggest that in the absence of a coordinated policy response, covering a range of interventions, costs will continue to increase, as this population continues to age more rapidly than the general population. Well-conceived interventions would be a worthwhile investment from both financial and social perspectives.

Financial independence

Fedor Iskhakov and Michael Keane

In this paper we structurally estimate a life-cycle model of consumption/savings, labor supply and retirement, using data from the Australian HILDA panel. We use the model to evaluate effects of the Australian aged pension system and tax policy on labor supply, consumption and retirement decisions. Our model accounts for human capital accumulation via learning by doing, as well as wealth accumulation and decumulation over the life cycle, uninsurable wage risk, credit constraints, a non-absorbing retirement decision, and labor market frictions. We account for the ’bunching’ of hours by discretizing job offers into several hours levels, allowing us to investigate labor supply on both intensive and extensive margins. Our model allows us to quantify the effects of anticipated and unanticipated tax and pension policy changes at different points of the life cycle. Our results imply that the Australian Aged Pension system as currently designed is very poorly targeted, so that means testing and other program rules could be improved.

Young family at home

Sarah Kaakai, Héloïse Labit Hardy, Séverine Arnold (-Gaille), Nicole El Karoui

Numerous studies have demonstrated the pervasive effect of socioeconomic status on mortality and cause-specific mortality. More recently, a growing number of studies have indicated a widening of socioeconomic inequalities. It has therefore become crucially important to understand and model the mortality of a heterogeneous population. Recent developments in multi-population mortality have improved the modeling and forecast of subpopulations mortality inside a national population. But this new class of models has raised a number of questions, among which the issue of consistency between subnational and national forecasts. Hence, modeling population dynamics provide complementary insights on subpopulations evolution as well as on aggregated quantities.

Aged care analysis

Yajing Xu, Michael Sherris and Jonathan Ziveyi

The pricing of longevity-linked securities depends not only on the stochastic uncertainty of the underlying risk factors, but also the attitude of investors towards those factors. In this research, we investigate how to estimate the market risk premium of longevity risk using investable retirement indexes, incorporating uncertain real interest rates using an affine dynamic Nelson-Siegel model. 

Pensioners enjoying a stroll

Shang Wu, Hazel Bateman, Ralph Stevens and Susan Thorp

We investigate whether a life care annuity - the integration of a life annuity with long-term care insurance (LTCI) - can enhance insurance participation to mitigate the economic puzzle of under- insurance in the longevity insurance and LTCI markets. Using an online choice experiment, we elicit individuals' preferences for consumption in different health conditions and their demand for a life care annuity and its health-contingent income feature. 

Data graphs

Michael Sherris, Yajing Xu and Jonathan Ziveyi

Multi-country risk management of longevity risk provides new opportunities to hedge mortality and interest rate risks in guaranteed lifetime income streams. This requires consideration of both interest rate and mortality risks in multiple countries. For this purpose, we develop value-based longevity indexes for multiple cohorts in two different countries that take into account the major sources of risks impacting life insurance portfolios, mortality and interest rates.

Cepar - Retirement Decisions

Susan Thorp, Hazel Bateman, Isabella Dobrescu, Ben R. Newell, and Andreas Ortmann

Simplified disclosures can make comparisons between complex financial products easier, and increase consumer expertise. We use incentivized experiments to investigate whether and to what extent simpler information on fees and investment returns assists retirement plan members to make competent choices.


Woman offering aged care support

Jennifer Alonso-García, Hazel Bateman, Johan Bonekamp, and Ralph Stevens

Implied endorsement is considered, together with inertia, as an explanation for the stickiness of defaults. This paper explores whether implied endorsement can serve as an explanation for the stickiness of defaults in the retirement decumulation phase.