1. ^aBusiness School, Shanghai Second Polytechnic University, No. 50, Yuan Ming Yuan Road, Shanghai, 200002, China. E-mail: hmaoi@online.sh.cn
2. ^bDepartment of Mathematics, Illinois State University, Campus Box 4520, William Hall 315E, Normal, IL 61790-4520, U.S.A. E-mail: krzysio@ilstu.edu
3. ^cDepartment of Risk Management and Insurance, Real Estate and Business Law, Florida State University, Tallahassee, Florida 32306, USA. E-mail: yw04c@garnet.acns.fsu.edu

Abstract

China has experienced significant improvement in longevity (commonly referred to as mortality improvement) since the late 1930s. The rate of mortality improvement has been faster than in most developed countries. This development has resulted in a great challenge to provide retirement income to the ageing population. This challenge is increased by the increasing presence of commercial annuity products in China. Such products should become an important source of retirement benefits. In this article, we propose a model of mortality improvement and calculate its factors using Chinese life tables. We also analyze the risks to annuity providers due to mortality improvement, and compare risks of mortality improvement for two different forms of annuities: equity-linked annuity and traditional fixed annuity. Finally, we provide several suggestions for managing risks of mortality improvement. In particular, we discuss a natural hedging strategy of issuing variable annuity instead of traditional annuity.