Investigating the broken-heart effect

The traditional assumption made in life insurance about the independence of the remaining lifetimes of a couple has come under greater scrutiny recently.

In this paper, the researchers postulate that dependence between coupled lifetimes is of a short-term type. That is, the chance of dying increases after the death of a partner but then returns over time to levels closer to normal. This is commonly described as a broken-heart effect.

The conventional premise in multiple life contingencies is that the remaining lifetimes of joint lives are mutually independent. Dependence between two lifetimes and its effect on insurance contracts have been investigated in several recent papers. Empirical investigations on coupled lives have shown that the assumption of independence is not realistic and can only be justified by computational convenience.

The mortality of couples in this study is analysed by fitting a multiple state model to a large insurance data set. Evidence is found that mortality rates increase after the death of a partner and, in addition, that this phenomenon diminishes over time. Remaining lifetimes of joint lives therefore exhibit short-term dependence. Numerical work was carried out involving the pricing and valuation of typical contingent assurance contracts and of a joint life and survivor annuity. If insurers ignore dependence, or mis-specify it as long-term dependence, then significant mispricing and inappropriate provisioning can result. Detailed numerical results are presented.

A full working version of the paper is now available for you to download below.


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