The financial implication of longevity improvements on the liabilities of annuity providers.

Abstract

Different countries around the world have experienced and improvement in mortality over the years. This improvement can be attributed to factors such as technological advancements in the medical field and improved living standards among others. This is generally a good thing , but for life insurance companies and defined benefit pension schemes that provide benefits in form of annuities, there lies the risk of longevity. Which is the risk that people will live longer than expected requiring them to be paid benefits for longer periods . This paper studies the implication of changes in Kenyan mortality on the value of an annuity. It focuses on the mortality of the annuitants in Kenya. These are people who have purchased life annuities from Kenyan insurance companies. Exponential extrapolative methods are used to obtain reduction factors that are later used to extrapolate mortality from the year 2011-2050. An annuity of Ksh.1 is then priced over the extrapolated period for each age range for all years, in order to determine how an annuity changes over the years. From the analysis , the Kenyan mortality has been reducing. This has an inverse effect on the value of annuities as the annuity prices are observed to increase with an increase in mortality over the years. This therefore exposes the Kenyan insurance companies to longevity risk.