Business and Economics Journal

Mortality Improvement and Risk Analysis in Chinese Annuity Insurance with Stochastic Interest Rate and Stochastic Investment Return

Abstract

Hong Mao, Krzysztof Ostaszewski*, Jin Wang and Zhongkai Wen

In this article, we use Vasicek model to describe the stochastic processes for the investment return and deposit interest rate. We take into account time-varying correlation between investment return and deposit interest on the net premium of annuity. We then propose a model for pricing investment-linked annuity and evaluate the risk of mortality improvement. We use historical data from China and illustrate our model with numerical analyses. These analyses show that the risk of mortality improvement of immediate annuity is greater than that of deferred annuity except for whole life annuity. We also find that the risk of mortality improvement increases with the increase of duration of insurance.