Beyond Age and Sex: Enhancing Annuity Pricing

Joelle H Fong
2014 The Geneva Risk and Insurance Review  
participants in the BPUB 900 seminar at The Wharton School for their valuable comments and discussions. I am indebted to Jeff R. Brown and Olivia S. Mitchell for use of the code for generating utility-equivalent wealth values. All errors are my own. Please direct correspondence to hfong@wharton.upenn.edu. Abstract Prices of standard annuity products in the United States do not currently reflect buyers' personal characteristics other than age and sex. I show that several readily-measurable risk
more » ... actors can significantly increase explained variability in mortality outcomes in a proportional hazards framework and use them to construct alternative pricing schemes. Simulation results show that more detailed pricing may help reduce adverse selection in annuity markets because shorter-lived groups are made much better off (and thus enter the market) while longer-lived groups are made only slightly worse off (and thus remain in the market). and participants in the BPUB 900 seminar at The Wharton School for their valuable comments and discussions. I am indebted to Jeff R. Brown and Olivia S. Mitchell for use of the code for generating utilityequivalent wealth values. All errors are my own. participants in the BPUB 900 seminar at The Wharton School for their valuable comments and discussions. I am indebted to Jeff R. Brown and Olivia S. Mitchell for use of the code for generating utility-equivalent wealth values. All errors are my own. Please direct correspondence to hfong@wharton.upenn.edu. Opinions and errors are solely those of the authors and not of the institutions providing funding for this study or with which the authors are affiliated. Abstract Prices of standard annuity products in the United States do not currently reflect buyers' personal characteristics other than age and sex. I show that several readily-measurable risk factors can significantly increase explained variability in mortality outcomes in a proportional hazards framework and use them to construct alternative pricing schemes. Simulation results show that more detailed pricing may help reduce adverse selection in annuity markets because shorter-lived groups are made much better off (and thus enter the market) while longer-lived groups are made only slightly worse off (and thus remain in the market).
doi:10.1057/grir.2014.12 fatcat:et5vy363kbcyhnzjlvlidjv7zu