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Cohort Mortality Risk or Adverse Selection in the UK Annuity Market?

43 Pages Posted: 25 May 2013  

E. S. Cannon

University of Bristol - Department of Economics

Ian Tonks

University of Bath School of Management

Date Written: April 1, 2013

Abstract

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

Cannon, E. S. and Tonks, Ian, Cohort Mortality Risk or Adverse Selection in the UK Annuity Market? (April 1, 2013). Netspar Discussion Paper No. 04/2013-017. Available at SSRN: https://ssrn.com/abstract=2269560 or http://dx.doi.org/10.2139/ssrn.2269560

Edmund Stuart Cannon

University of Bristol - Department of Economics ( email )

Senate House
Tyndall Avenue
Bristol BS8 ITH
United Kingdom

Ian Tonks (Contact Author)

University of Bath School of Management ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

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