A note on pricing inflation-indexed life annuities

D. Lazar

doi:10.1556/aoecon.57.2007.4.3

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Acta Oeconomica

Volume/Issue:: Volume 57: Issue 4

A note on pricing inflation-indexed life annuities

Author:

D. Lazar

D. Lazar Babeş-Bolyai University Department of Statistics, Forecasting and Mathematics, Faculty of Economics and Business Administration Teodor Mihali 58–60 400591 Cluj-Napoca Romania

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Pages:: 363–376

Online Publication Date:: 04 Dec 2007

Publication Date:: 01 Dec 2007

Article Category:: Journal Article

DOI:: https://doi.org/10.1556/aoecon.57.2007.4.3

Keywords:: inflation-indexed life annuities; partial indexed pensions; ARIMA models; real interest rate; simulation; G13; G22

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This paper deals with the topic of inflation protection of pensions and the pricing process for inflation-indexed life annuities. Several ways of partial indexation of pensions are taken into consideration. Future inflation paths are obtained by simulation of a stochastic time series model. The main advantage of the proposed methodology is that it allows the pricing of partially inflation-indexed pensions. The pricing process is based on the hypothesis that the annuities provider guarantees a certain level of the real interest rate. Certain numerical results are obtained. Taking into account that inflation is generated by autoregressive processes of order one AR(1), empirical distributions of the expected present value (EPV) are determined for some partial inflation-indexed life annuities. Numerical results achieved for an AR(1) model that describes the evolution of the inflation rate in Spain during the period 1962–2005 are also presented. Results gained allow the comparison of the mean and standard deviation calculated on the basis of empirical distributions of the EPV for various types of partially indexed annuities, and also for various values of AR(1) model parameters. By flexible offers, insurers may meet the expectations of the annuitants, regarding both price and guaranteed protection against inflation.

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Acta Oeconomica Periodical of the Hungarian Academy of Sciences

Print ISSN:: 0001-6373

Online ISSN:: 1588-2659

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Péter Benczúr, Joint Joint Research Center, European Commission
Dóra Benedek, International Monetary Fund
Balázs Égert, OECD
Dániel Prinz, World Bank
Rok Spruk, University of Ljubljana, School of Economics and Business, Slovenia

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Anders Åslund, Georgetown University and Advisory Council of CASE, USA
István Benczes, Corvinus University of Budapest, Hungary
Agnieszka Chłoń-Domińczak, SGH Warsaw School of Economics, Poland
Fabrizio Coricelli, University of Siena, Italy
László Csaba, Corvinus University of Budapest, Hungary and Central European University, Austria
Beáta Farkas, Faculty of Economics and Business Administration, University of Szeged, Hungary
Péter Halmai, Budapest University of Technology and Economics, and National University of Public Service, Hungary
Martin Kahanec, Central European University, Austria
Michael Landesmann, The Vienna Institute for International Economic Studies (WIIW), Austria
Péter Mihályi, Corvinus University of Budapest, Hungary
Debora Revoltella, European Investment Bank

Corvinus University of Budapest
Department of Economics
Fővám tér 8 Budapest, H-1093, Hungary
E-mail: judit.kalman@uni-corvinus.hu

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Acta Oeconomica
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