SCHAUMBURG, Jan. 25, 1999 -- Three researchers have been named winners of the David Garrick Halmstad Prize for a study showing that the two lives covered by a two-person joint and last-survivor annuity, when considered as dependent rather than independent, have a significant impact on the annuity's value. The innovative research used a mathematical function that has more recently been applied in biomedical research. Using a specific type of this function with a specific set of data, researchers found annuity values declined about 5 percent.
The Halmstad Prize is given annually by the Actuarial Education and Research Fund (AERF). Nominations are made by the Halmstad Prize committee of the Society of Actuaries' Education and Research Section. The Society is North America's largest actuarial education and research organization.
The winning entry, "Annuity Valuation with Dependent Mortality," was published in a June 1996 issue of The Journal of Risk and Insurance. The researchers were Edward W. Frees, professor of business, University of Wisconsin School of Business, Madison, Wis.; Jacques Carriere, associate professor, Department of Mathematical Sciences, University of Alberta, Edmonton, Alberta, Canada; and Emiliano Valdez, senior lecturer, Nanyang Business School, Nanyang Technological University, Singapore.
Like other annuities, joint annuities promise to pay a consistent amount at regular intervals. Adequate premiums and reserves are important to assure that enough funds will be available to make the promised payments. Premiums and reserves are based on factors including the probable length of survival of those covered by the annuity. The length of one or both lives will indicate the number of required payments and the amount of funds needed to cover those payments. In the article, the researchers noted that joint survival has typically been estimated assuming independence of the lives covered -- that is, the death of one person covered by the annuity has no relationship to the continuing or ending of the other's life. However, the article said, "several empirical studies of joint lives in noncommercial contexts have established that survival of pairs are not independent events."
The researchers showed a strong positive dependence, with real economic significance, between joint lives using a bivariate distribution function called a copula. Biomedical researchers have used this function to study joint mortality between twins, fathers and sons and other pairs. Data for the study consisted of 14,947 joint and last-survivor annuity contracts in payout status with a large Canadian insurer from Dec. 29, 1988, through Dec. 31, 1993. Using this data to calibrate their copula model, the researchers found that in this instance, considering two covered lives as dependent rather than independent reduced annuity values by about 5 percent.
The research was supported by the Society of Actuaries. Frees' research was also partially supported by a professorship funded by the Time Insurance Company and the U.S. Social Security Administration. The Halmstad Prize has been awarded annually since 1978 for the best paper on actuarial research published in the 12 most prestigious English-language and insurance actuarial journals. The more than 20 individuals who comprise the Society section's Halmstad Prize committee can nominate up to five papers from each journal. The committee consists of established, senior actuarial researchers and prominent actuaries in commercial practice. The final papers recommended by the committee are submitted to the Board of Directors of the AERF, which administers the award; the board makes the final determination. The AERF carries out research and education projects in the field of actuarial science on behalf of the actuarial profession and its sponsoring organizations.
The prize is named for David Garrick Halmstad, an Associate of the Society of Actuaries who made significant contributions to actuarial science and research. Funds for the prize were contributed by his friends and colleagues.
Copies of the award-winning article are available free of charge from the Society of Actuaries' library (phone: 847-706-3575; fax: 847-706-3599; e-mail: ebull@soa.org).
The Society of Actuaries, with 16,500 members primarily in the United States and Canada, is North America's largest professional organization for actuaries. The Society provides key educational services to actuaries and sponsors and conducts actuarial research. Society members practice primarily in the fields of life and health insurance, pensions, employee benefits and investments.
NOTE: Journalists may obtain copies from Jackie Bitowt, 847-706-3566, jbitowt@soa.org
Journal
Journal of Risk & Insurance