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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: martin.weale@outlook.com
E-mail: j.vandeven@niesr.ac.uk
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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

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