Grouped multivariate and functional time series forecasting: an application to annuity pricing

Abstract

Age-specific mortality rates are often disaggregated by different attributes, such as sex, state, ethnic group and socioeconomic status. In making social policies and pricing annuity at national and subnational levels, it is important not only to forecast mortality accurately, but also to ensure that forecasts at the subnational level add up to the forecasts at the national level. This motivates recent developments in grouped functional time series methods (Shang and Hyndman, in press) to reconcile age-specific mortality forecasts. We extend these grouped functional time series forecasting methods to multivariate time series, and apply them to produce point forecasts of mortality rates at older ages, from which fixed-term annuities for different ages and maturities can be priced. Using the regional age-specific mortality rates in Japan obtained from the Japanese Mortality Database, we investigate the one-step-ahead to 15-stepahead point-forecast accuracy between the independent and grouped forecasting methods. The grouped forecasting methods are shown not only to be useful for reconciling forecasts of age-specific mortality rates at national and subnational levels, but they are also shown to allow improved forecast accuracy. The improved forecast accuracy of mortality rates is of great interest to the insurance and pension industries for estimating annuity prices, in particular at the level of population subgroups, defined by key factors such as sex, region, and socioeconomic grouping.