Incorporating dependence into the pricing of joint life annuities.

Abstract

This study incorporated dependence of lives into the pricing of joint life annuities in Kenya. Currently the Kenyan industry practitioners base this pricing on the traditional assumption of independence oflives which has long been discredited as it ignores the fact that the underlying lives face similar risks . To value benefits under these policies accurately, a statistical model that assesses the impact of survivorship of one life on another was applied in this study. The Markovian model was applied to incorporate dependence into the pricing ofjoint life annuities. In the Markovian model the researcher considered three types of dependence which are : a) the instantaneous dependence that is due to a catastrophic event affecting both lives; b) the short-term dependence that can cause death to a surviving partner after the death of the spouse; c) the long-term dependence that results from the association between lifetimes, to generate the joint probabilities of survival that were then incorporated into the pricing of joint life annuities.