Modeling longevity and chronic illness risks in retirement annuity pricing for older Malaysians
As Malaysia’s population ages, understanding the financial implications of longevity risk and chronic illnesses among the older population is increasingly important. This study investigates how longevity risk interacts with selected chronic illnesses among older Malaysians using a multiple-state annuity model. First, the study explored the mortality and morbidity risks of selected chronic illnesses affecting older Malaysians. This research employed actuarial modeling techniques, including the Markov chain model, the Lee–Carter model, and the age-period-cohort (APC) model. The Markov chain model estimated the likelihood of health transitions, while the Lee–Carter model and the APC model were employed to project mortality and morbidity rates. These models offer a comprehensive framework to assess the longevity risk and financial pressures associated with managing chronic illnesses in aging populations. Second, the projected rates were utilized in the retirement annuity pricing models. There were two multiple-state annuity pricing models considered, one with only healthy and dead states, and the other included chronic illness states. Overall, increased longevity resulting from ongoing improvements in mortality will raise the cost of annuities for a predetermined annuity payment at the compulsory retirement age. By contrast, the inclusion of chronic illness risk in annuity pricing reduces the cost of an annuity for retirees. Hence, the risks of longevity and chronic illness will be taken into account to fairly price retirement-linked products such as annuities.
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