Professor Xiang Hu, the co-director of the base ,has published a paper titled "Longevity risk, health state transitions, and the demand for insurance" in International Review of Financial Analysis.

Abstract: This study analyzes the relationship between longevity risk and health state transitions within the framework of a lifecycle model. We explore optimal insurance allocation, encompassing both annuities and long-term care insurance (LTCI) under different morbidity scenarios to meet urban and rural residents' old-age security needs. Using data from the China Health and Retirement Longitudinal Study (CHARLS), we calculate residents' health state transition probabilities and calibrate them based on mortality rates projected using the Lee–Carter model. The study finds that: First, for residents with low initial endowments, the demand for annuities and LTCI is entirely suppressed by minimum living standard. Second, under the interaction between longevity risk and health state transitions, residents in the morbidity expansion scenario have a higher willingness to purchase annuities and LTCI insurance to hedge against longevity and health risks. For urban residents, the demand for annuities and LTCI increases significantly even at lower initial wealth levels, whereas a significant increase in insurance demand is only observed at higher initial endowments for rural residents. Third, under the optimal decision, simultaneously purchasing annuities and LTCI raises residents' consumption levels and facilitates a more reasonable distribution of wealth across different age groups. The results reveal how households facing combined longevity and health risks can optimize financial asset allocation through insurance instruments, providing important references for insurers in product design.

Keywords: Health state transitions; Longevity risk; Morbidity rate; Demand for insurance

Link: https://erj.ajcass.com/#/issue?id=122073&year=2025&issue=12

Author profile

Xiang Hu, Ph.D. in Economics, Professor, Ph.D. Supervisor, China Associate Actuary. His main research directions are insurance economics, actuarial science and risk management. He serves as a Standing Director of the Actuarial and Risk Management Branch of the Chinese Association for Applied Statistics, a Standing Director of the Quantitative Finance and Insurance Branch of the Chinese Society of Optimization, Overall Planning and Economic Mathematics, and a Director of the China Disaster Insurance and Risk Reduction Branch. He has published more than 30 papers in international journals in the field of insurance actuarial science and risk management, such as ASTIN Bulletin, Insurance: Mathematics and Economics, North American Actuarial Journal, Scandinavian Actuarial Journal, as well as domestic core journals such as Statistical Research and Systems Engineering - Theory & Practice. He has presided over and participated in more than 10 research projects funded by the National Natural Science Foundation of China, the National Social Science Foundation of China, the National Healthcare Security Administration, and the China Insurance Society.