City Research Online

Abstract

This paper studies the dependence between coupled lives - both within and across generations - and its effects on prices of reversionary annuities in the presence of longevity risk. Longevity risk is represented via a stochastic mortality intensity. Dependence is modelled through copula functions. We consider Archimedean single and multi-parameter copulas. We and that dependence decreases when passing from older generations to younger generations. Not only the level of dependence but also its features - as measured by the copula - change across generations: the best-fit Archimedean copula is not the same across generations. Moreover, for all the generations under exam the single-parameter copula is dominated by the two-parameter one. The independence assumption produces quantifiable mispricing of reversionary annuities. The misspecification of the copula produces different mispricing effects on different generations. The research is conducted using a well-known dataset of double life contracts.

Publication Type:	Monograph (Working Paper)
Publisher Keywords:	copula, goodness-of-fit, significance test, stochastic mortality, generation effect, reversionary annuity.
Subjects:	H Social Sciences > HG Finance
Departments:	Bayes Business School > Actuarial Science & Insurance > Actuarial Research Reports

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