Valuing Annuities Based on Alternative Mortality Projections

Future mortality is a key component when pricing longevity-based products such as annuities. Estimating future mortality is, however, a significant challenge, with a range of approaches adopted by various users to date. We describe the recent developments in mortality projections that have arisen from the UK Institute and Faculty of Actuaries Continuous Mortality Investigation (CMI), and apply this method to Australian mortality data. Projected mortality under this approach is used to calculate values for both immediate and deferred life annuities, and is compared with values arising from other mortality projections for Australia. Our results are noticeably similar to other projection approaches, in particular those of Tickle and Booth (2014) and the Productivity Commission (2013). Sensitivity analyses are also presented. It is apparent that an embedded and ongoing practice of effective risk management, rather than the mere pursuit of a more accurate picture of future mortality, is key to managing longevity exposure.