Cohort Mortality Risk or Adverse Selection in the UK Annuity Market?
43 Pages Posted: 25 May 2013
Date Written: April 1, 2013
The "money's worth" measure has been used to assess whether annuities are fairly valued and also as evidence for adverse selection in the annuity market. However, a regulated life assurer with concerns about predicting long-run mortality may price annuities to reduce these risks which will affect the money’s worth. We provide a simple model of the effect of cohort mortality risk on the money’s worth. We demonstrate that cohort mortality risk is quantitatively important, and show that it is not possible to identify the effect of a cohort mortality risk model from that of an adverse selection model.
Keywords: Adverse selection, insurance markets, annuities
JEL Classification: D4, D82, G22
Suggested Citation: Suggested Citation