Blog 21: Annuites Explanation by Xavier Lo, FIA

Annuities [年金] are something which the Hong Kong government [香港政府] would like everyone to purchase. To understand why the government would want us to buy this, lets take a look at what they are.

To put it very simply, annuities are a way for people to turn a big pot of money (referred to as “lump sum” [大金額]) into a regular money stream [定期金流]. This money usually gets paid either annually [每年] or monthly [每月] until the person dies [過身] (yes, actuaries are used to dealing with people dying!). In other words, the person removes the uncertainty [不肯定因數] of not having enough money for the rest of his life by buying an annuity.

You can buy annuities from insurance companies. But how do actuaries calculate how much to pay the person per month or year? Well, by Law of Large Numbers [大數定律] (see previous blog), actuaries can use a person’s life expectancy [預期壽命] to see how many periods of cash the insurance company has to pay, then make the relevant calculations. Of course, there will also be other factors like profit loadings [利潤率], investment returns [投資回報] or discounting factors [時間價值] – but these are too complex to discuss here. Feel free to discuss below or DM me!

So why would the government want people to buy annuities? Well, there is a social and economic cost [社會同經濟成本] for the government if there are lots of old and financially dependent people. Of course they would want everyone to survive by themselves!

Xavier Lo, FIA, FRM, MBA
Qualified fellow actuary (in UK and Hong Kong), Financial Risk Manager, and MBA graduate (listed on the Dean's List) with a passion for insurance, data science, and analytics. Experienced in a broad range of insurance roles (pricing, capital modelling, reserving, ERM), along with a touch of knowledge in banking. Member of the General Insurance Committee (2021), Actuarial Innovation Committee (2019 - 2021) in ASHK.
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