Risk classification: annuity rates

Ermanno Pitacco

9.1 INTRODUCTION: CAPTURING THE INDIVIDUAL RISK PROFILE

When selling a life annuity product (and, generally, a life contingency product) the insurer should charge a premium that, at least to some extent, captures the individual risk profile in terms of the annuitant’s (or insured’s) probabilities of survival. A number of different annuity rates are then adopted to price life annuities. Hence, life annuities can be examined according to the annuity rate criterion (see Section 4.6.1).

The choice of the annuity rate to be applied when pricing a life annuity product is a problem of risk classification. Moving from risk factors to rating factors (ie, those risk factors that are actually accounted for in the pricing, or “rating”, procedure) is a matter of, on the one hand, the detecting the possible level (or “value”) and the impact of risk factors and, on the other, being allowed by the existing legislation to use some risk factors in the pricing procedure.

In the following sections, we first address some general aspects of risk classification and rating procedures in insurance and life annuity business. We then move on to specific problems concerning life annuities, focusing