A new perspective on longevity risk perception Statistical models based on actuarial data are used to project longevity, yet as individuals we often use heuristics when asked to consider our own longevity. We spoke to Professor Enrico De Giorgi and Dr Giovanna Apicella about how they’re combining behavioural and actuarial insights to bring a fresh perspective to how we perceive longevity risk. An annuity appears
to be an attractive option for individuals planning their retirement, providing people with a guaranteed income for the rest of their lives rather than the uncertainty associated with managing their own money. However, despite the benefits widely associated with annuities, the market for individual life annuities is fairly small in the US, UK and many other developed countries, part of what has been termed the annuity puzzle. “Very few individuals buy private annuities, the market is not that big,” says Enrico De Giorgi, Professor of Mathematics at the University of St.Gallen. Together with his colleague Dr Giovanna Apicella, Professor De Giorgi has looked into data from the Health and Retirement Study (HRS) and SHARE to gain some fresh insights on why people might choose not to buy annuities. “When we looked at the data we discovered that there was a marked disparity between people’s subjective beliefs about their own survival prospects, relative to their actuarial probability of surviving,” he continues.
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This could be an important factor in why many people decide not buy an annuity. The data shows that young people significantly under-estimate their own longevity, and then when people get to the age of 75 or even older, they may find that annuities are too expensive. “It may prove hard to buy an
more important in financing retirement,” he outlines. “The cost of conventional pension systems is becoming very, very high, precisely because people are living for longer. Giovanna has a very good knowledge of these issues from an actuarial point of view, while I come more from a behavioural perspective.”
It’s important that people save their money into private pension plans, so that they can have the same quality of life when they retire as they did when they were younger. We want to understand why many people are not currently willing to do this. annuity at that stage, despite the fact that rates are higher” explains Professor De Giorgi. As the Principal Investigator of a new research project, Professor De Giorgi aims to shed new light on the subjective beliefs which influence our decisions in this area, work which holds important implications in the context of our aging society and the need to fund care for high numbers of elderly people. “The private insurance market will become more and
Behavioural insights The aim in the project is to bring a fresh perspective to the available data by combining these two viewpoints. This involves looking into the underlying reasons why younger people initially under-estimate their own longevity, while generally older people have a tendency to over-estimate it, often using heuristics. “Heuristics are a mental tool we use to estimate probabilities,”
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