We apply generalized linear models to evaluate disability transitions for individuals in old age based on a large sample of U.S. elderly. We estimate a multi-state model for long-term care insurance applications, and find significant differences in disability rate patterns and levels from the commonly-used Robinson (1996) model. Our results suggest that the elderly face a 10% chance of becoming long-term care disabled only at ages past 90, rather than in their 80s. Furthermore, age patterns of recovery are found to differ significantly between the sexes. These estimates of transition probability are sensitive to the definition of 'long-term care disability', which has implications for the design of benefit triggers for private and public long-term care insurance programs.

Self-control problem is an important determinant of individuals' economic decisions. The decision maker's future utility is affected by unwanted temptation. This implies that implications of various government policies would differ if one incorporates these behavioural aspects. Public finance instruments could, however, be used to correct anomalies created by temptation. The purpose of this paper is to examine the question of optimal taxation when individuals have self-control problems. In order to capture our agents' temptation towards current consumption, our model make use of the preference structure pioneered by Gul and Pesendorfer and further elaborated by Krusell et al. in the context of optimal taxation. We extend by adding labor choice and besides savings tax, we also analyze capital income tax, consumption tax and labor income tax. Results show that when the analysis is restricted to logarithmic preferences separable in consumption and labor supply, the government should subsidize either capital income or investment as it maximizes both an individual's commitment utility for consumption and labor supply at the same time. Because individuals consume and supply labor more than their commitment utility, subsidizing improves welfare as it makes temptation less attractive.

Systematic improvements in mortality increases dependence in the survival distributions of insured lives. This is not accounted for in standard life tables and actuarial models used for annuity pricing and reserving. Furthermore, systematic longevity risk undermines the law of large numbers; a law that is relied on in the risk management of life insurance and annuity portfolios. This paper applies a multivariate Tweedie distribution to incorporate dependence, which it induces through a common shock component. Model parameter estimation is developed based on the method of moments and generalized to allow for truncated observations. The estimation procedure is explicitly developed for various important distributions belonging to the Tweedie family, and finally assessed using simulation.

This paper estimates and compares methods of constructing disaggregated house price indices from existing house price models using individual sales data for Sydney. Nine alternative house price models are selected to cover the most frequently used methods in the literature: the mean model, median models (standard and stratified), hedonic models (restricted and unrestricted hedonic), repeat-sales models (age-adjusted and Case-Shiller weighted), and a hybrid of the hedonic and repeat-sales model. The unrestricted hedonic model and the hybrid model have an advantage over the other seven models in that they do not require stratification of the data for estimating disaggregated indices. Both models employ the whole sample to estimate implicit prices of house characteristics that are used to construct disaggregated house price indices. These two models eliminate variability arising from small sample sizes and provide more efficient estimates of house price heterogeneity. In addition, house characteristics that are important drivers of the variability of individual house prices are identified in the two models. Disaggregated indices constructed from these two models provide more accurate comparisons with an aggregated house price index. We quantify the extent to which disaggregated house prices indices have significantly more variability than, and differing trends from, the aggregate index.

We report the results of two laboratory experiments that study how university student and staff participants chose retirement savings investment options using 'user‐friendly' information prescribed by regulators. We demonstrate that choices of more than 20% of participants cannot be predicted using any of the prescribed information items but that 30% of participants used all, or almost all, items, frequently in unexpected ways. A pie‐chart showing asset allocation had the largest marginal impact on investment choices. Participants preferred options with more segmented pies (lower concentration) and with equally sized segments (lower deviation from a 1/n allocation). This choice behaviour is consistent with the application of a simple diversification heuristic. Participants cannot choose more than one investment but are guided by the extent to which a pre‐mixed investment option appears evenly balanced across asset classes. This novel application of a 1/n strategy is distinct from existing findings of naïve diversification in 'mix‐it‐yourself' conditions where participants spread resources evenly across funds or categories. The results highlight that information contained in prescribed investment disclosures may not be used in the manner intended by the regulator. The results also pose interesting methodological questions about the way 'user‐friendly' information prescribed by regulators is validated before being legislated.

An uncertain economic outlook and the certitude of an ageing population highlight the importance of productivity across all age groups for Australia's future. This paper provides national findings on both paid, tax-generating and unpaid, voluntary productivity across the life course, focusing primarily on the baby boomer cohort now in late middle age. Findings from Wave 10 (2010) of the Household, Income and Labour Dynamics in Australia (HILDA) Survey are presented showing productive activities including paid work, volunteering, caregiving, childcare, and domestic work. The results indicate that the kinds of productivity vary across age groups for men and women, the potential competition between paid work and other activities, and the importance of health and education for productivity across all ages. The findings reinforce the value of investment in human capital for productivity across the lifespan inclusive of middle and late life. The Government can lead action to enhance and recognise these contributions that benefit the social standing and well being of ageing individuals as well as bring economic and social benefits to the broader community.

When siblings are concerned for the well-being of their elderly parents, the costs of care giving and long-term commitment create a free-rider problem. If siblings living near their parents can share the costs, this positive externality exacerbates the under-provision of proximate living. Location decisions allow siblings to make a commitment to not provide long-term support for parents, and if decisions are made in birth order, elder siblings may enjoy the first-mover advantage. To quantify these effects, we study siblings' location decisions relative to parents by estimating a sequential participation game that features rich heterogeneity. We find moderate altruism and cooperation in the US that imply: (1) limited strategic behaviour: more than 90% of children have a dominant strategy; and (2) non-negligible free-riding: of the families with multiple children, had siblings fully internalized externality and jointly maximized their utility, 18.3% more parents would have had at least one child nearby.

Changes in underlying mortality rates significantly impact insurance business as well as private and public pension systems. Individual mortality studies have data limitations; aggregate mortality studies omit many relevant details. The study of causal mortality represents the middle ground, where population data is used while cause-of-death information is retained.We use internationally classified cause-of-death categories and data obtained from the World Health Organization. We model causal mortality simultaneously in a multinomial logistic framework. Consequently, inherent dependence amongst the competing causes is accounted for. This framework allows us to investigate the effects of improvements in, or the elimination of, cause-specific mortality in a sound probabilistic way. This is of particular interest for scenario-based forecasting purposes. We show the multinomial model is more conservative than a force-of-mortality approach. Finally, we quantify the impact of cause-elimination on aggregate mortality using residual life expectancy and apply our model to a French case study.

We analyze the risk and profitability of reverse mortgages with lump-sum or income stream payments from the lender's perspective. Reverse mortgage cash flows and loan balances are modelled in a multi-period stochastic framework that allows for house price risk, interest rate risk and risk of delayed loan termination. A VAR model is used to simulate economic scenarios and to derive stochastic discount factors for pricing the no negative equity guarantee embedded in reverse mortgage contracts. Our results show that lump-sum reverse mortgages are more profitable and require less risk-based capital than income stream reverse mortgages, which explains why this product design dominates in most markets. The loan-to-value ratio, the borrower's age, mortality improvements and the lender's financing structure are shown to be important drivers of the profitability and riskiness of reverse mortgages, but changes in these parameters do not change the main conclusions.

Changing demographics creates the potential for the expansion of existing and new products to manage longevity risk. Life annuities address this risk, yet these annuity product markets are thin. Insurers are concerned about the long term risks associated with these longevity products and capital requirements. Life insurers also offer life insurance products, whole-of-life and term, that provide an opportunity to offset longevity risks. This can allow capital efficient longevity risk products to be sold as part of a product portfolio. Natural hedging, or the offsetting of risks in life insurance and annuity business, provides a way of managing capital efficiently as well as improving profitability. This paper uses stochastic mortality and interest rate models to assess life and annuity capital requirements and quantify the benefits of natural hedging taking into account relative profit loadings on products. The benefits of offering longevity products, in terms of capital requirements, as well as the importance of the type of life insurance products offered are illustrated using standard life and annuity products. The impact of capital requirements, such as solvency II with a one-year horizon, are considered and compared to multiple period risk measures to confirm the results hold for regulatory capital requirements.

A significant number of individuals are unwilling to deposit their savings into the banking sector since it does not operate according to their religious beliefs. In this paper we provide a model that aims to answer the following questions: First, under what conditions an alternative banking system would arise? Second, what are the growth, and welfare implications of these banking systems? Our model shows that an alternative banking system would arise if individuals have religious concerns. Moreover, we show that in an economy populated with a certain number of religiously concerned individuals, the existence of an alternative baking system can generate relatively higher growth and improve welfare.

Longevity risk is amongst the most important factors to consider for pricing and risk management of longevity products. Past improvements in mortality over many years, and the uncertainty of these improvements, have attracted the attention of experts, both practitioners and academics. Since aggregate mortality rates reflect underlying trends in causes of death, insurers and demographers are increasingly considering cause-of-death data to better understand risks in their mortality assumptions. The relative importance of causes of death has changed over many years. As one cause reduces, others increase or decrease. The dependence between mortality for different causes of death is important when projecting future mortality. However, for scenario analysis based on causes of death, the assumption usually made is that causes of death are independent. Recent models, in the form of Vector Error Correction Models (VECM), have been developed for multivariate dynamic systems and capture time dependency with common stochastic trends. These models include long-run stationary relations between the variables, and thus allow a better understanding of the nature of this dependence. This paper applies VECM  to cause-of-death mortality rates in order to assess the dependence between these competing risks. We analyze the five main causes of death in Switzerland. Our analysis confirms the existence of a long-run stationary relationship between these five causes. This estimated relationship is then used to forecast mortality rates, which are shown to be an improvement over forecasts from more traditional ARIMA processes, that do not allow for cause-of-death dependencies.

Equity release products are sorely needed in an ageing population with high levelsof home ownership. There has been a growing literature analyzing risk components andcapital adequacy of reverse mortgages in recent years. However, little research has been doneon the risk analysis of other equity release products, such as home reversion contracts. This is partly due to the dominance of reverse mortgage products in equity release marketsworldwide. In this paper, we compare cash flows and risk profiles from the provider'sperspective for reverse mortgage and home reversion contracts. An at-home/in long-term caresplit termination model is employed to calculate termination rates, and a vector autoregressive (VAR) model is used to depict the joint dynamics of economic variables including interest rates, house prices and rental yields. We derive stochastic discount factorsfrom the no arbitrage condition and price the no negative equity guarantee in reverse mortgages and the lease for life agreement in the home reversion plan accordingly. We compare expected payoffs and assess riskiness of these two equity release products via commonly used risk measures, i.e., Value-at-Risk (VaR) and Conditional Value-at-Risk (CVaR).