Frailty Models Applications In Pension Schemes
Abstract
Heterogeneity in a population of assured lives in respect of mortality can be explained by
differences among the individuals; some of these are observable, while others, for
instance an individual's attitude towards health and/or all genetic factors having influence
on survival are difficult to monitor and measure. This undermines usage of observable
risk factors as the only rating factors for life insurance. Insurance companies have not
taken proper care of unobservable risk factors possibly due to difficulties inherent in their
modeling. This heterogeneity exposes insurers to adverse selection if only the healthiest
lives purchase annuities, so standard annuities are priced with a mortality table that
assumes above-average longevity. This makes standard annuities expensive for many
individuals. To avoid biases in valuation a better understanding of heterogeneity in
required.
Frailty models are extensions of the Cox proportional hazards model which is popular in
survival studies. In many applications, the study population needs to be considered as a
heterogeneous sample. Sometimes, due to lack of knowledge or for economical reasons,
some covariates related to the event of interest are not measured. The frailty approach is a
statistical modeling method which aims to account for the heterogeneity caused by
unmeasured covariates. It does so by adding random effects which act multiplicatively on
the hazard.
This study carries out an extensive review of frailty models and is aimed at extending this
work by considering other distributions that can be used in modeling. In particular, the
non-central gamma distribution is proposed for frailty modeling.
Citation
Walter O. Onchere (2013). Frailty Models Applications In Pension Schemes. Master of Science in Actuarial ScPublisher
University of Nairobi School of Mathematics