Hostname: page-component-586b7cd67f-rdxmf Total loading time: 0 Render date: 2024-11-24T02:37:12.621Z Has data issue: false hasContentIssue false
  • English
  • Français

Variable annuities and aggregate mortality risk

Published online by Cambridge University Press:  01 January 2020

Martin Weale  and
Justin van de Ven
Martin Weale*
Affiliation:
Monetary Policy Committee and Queen Mary, University of London
Justin van de Ven*
Affiliation:
University of Melbourne and National Institute of Economic and Social Research
*
E-mail: [email protected]
E-mail: [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper explores the extent to which annuitants might be prepared to pay for protection against cohort-specific mortality risk, by comparing traditional indexed annuities with annuities whose payout rates are revised in response to differences between expected and actual mortality rates of the cohort in question. It finds that a man aged 65 with a coefficient of relative risk aversion of two would be prepared to pay 75p per £100 annuitised for protection against aggregate mortality risk while a man with risk aversion of twenty would be prepared to pay £5.75 per £100; studies put the actual cost at £2.70–£7 per £100, suggesting that unless annuitants are very risk averse it is likely that existing products tend to over-insure against cohort mortality risk.

Keywords

variable annuityaggregate mortality riskrisk aversionD14D91J11J14
Type
Research Articles
Information
National Institute Economic Review , Volume 237 , August 2016 , pp. R55 - R61
Copyright
Copyright © 2016 National Institute of Economic and Social Research

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Aegon Global Pensions (2011), Paying the Price for Living Longer. What is the Right Price for Removing Longevity Risk?Google Scholar
Barro, R. J. (2006), ‘Rare disasters and asset markets in the twentieth century’, Quarterly Journal of Economics, 121, pp. 823–66.CrossRefGoogle Scholar
Campbell, J., and Coco, J.F. (2003), ‘Household risk management and optimal mortgage choice’, Quarterly Journal of Economics, 118, pp. 1449–94.CrossRefGoogle Scholar
Cannon, E. and Tonks, I. (2011), ‘Annuity markets: welfare, money's worth and policy implications’, Netspar Panel Paper No 24. http://www.bath.ac.uk/management/research/pdf/tonks-cannon-annuity-markets.pdf.Google Scholar
Deaton, A. (1992), Understanding Consumption, Oxford: Clarendon Press.CrossRefGoogle Scholar
Lane, Clark and Peacock (2008), Pension Buyouts, www.lcp.uk.com/information/documents/LCPPensionBuyouts2008.pdf.Google Scholar
Maurer, R., Mitchell, O.S., Rogalla, R. and Kartashov, V. (2013), ‘Lifecycle portfolio choice with systematic longevity risk and variable investment – linked deferred annuities’, Journal of Risk and Insurance, 80, pp. 649–76.CrossRefGoogle Scholar
Mehra, R. and Prescott, E.C. (1985), ‘The equity premium: a puzzle’, Journal of Monetary Economics, 15, pp. 145–61.CrossRefGoogle Scholar
Pensions Commission (2004), Pensions: Challenges and Choices, Norwich: The Stationery Office.Google Scholar
Piggott, J., Valdez, E.A. and Detzel, D. (2005), ‘The simple analytics of a pooled annuity fund’, Journal of Risk and Insurance, 72, pp. 497–520.CrossRefGoogle Scholar
Van de Ven, J. and Weale, M.R. (2010), ‘An empirical investigation of quasi-hyperbolic discounting’, National Institute Discussion Paper No. 355, http://www.niesr.ac.uk/sites/default/files/publications/dp355_0.pdf.Google Scholar
Weale, M.R. and Wieladek, T. (2016), ‘What are the macroeconomic effects of asset purchases’, Journal of Monetary Economics, 79, pp. 81–93.CrossRefGoogle Scholar
Supplementary material: PDF

Weale and van de Ven Supplementary Material

Weale and van de Ven Supplementary Material

Download Weale and van de Ven Supplementary Material(PDF)
PDF 180.8 KB