Longevity Risk and Private Pension Funds- Analysis of Longevity Risk Using the Renshaw-haberman Model

Abstract

Longevity risk is a main topic of study abroad and has just started being a point of analysis in third world countries. Due to the increase in life expectance there has been a strain on the national pension funds and life assurance holding rms. A lot of research has been done on Lee-Carter models of longevity risk and there has been evidence in almost every research that longevity risk exists in third world countries’ populations. However, little research has been done on the e ects of cohorts on longevity risk in the same regions. A cohort study is a study on a group of individuals with something like one speci c shared experience within a certain time period. The most well-known example is a "birth cohort", that is, the people in the group are born in the same time or amid a similar era. In a prospective study, we are examining a group of individuals over time by observing patterns of e ects or outcomes due to the cohort di erences within the group. This study focused on modelling the e ects of longevity risk and measuring the e ects of age-period cohorts. The study used the Renshaw-Haberman to model the e ects of longevity on mortality for Kenya (period: 1970-2010). A time-varying mortality index is forecasted in an ARIMA framework and is used to generate projected life expectancies at normal retirement age. The study then modelled the life expectance for the next 50 years from 2010. The e ects of longevity risk on the annuities reserves and pension positions. The study found that the longevity risk exists and that an increase in life expectance results in an increase in the cost of pay-outs for pensioners in the market. The study also found that an improvement in age speci c cohort risk results in a higher life expectation and lower mortality risk.