Mortality Risk and Pricing of Annuities

Pub. Date
29 August, 2008
Pub. Type

This paper discusses the way in which payments from pooled annuity funds need to be adjusted to take account of the fact that future mortality rates are uncertain. Mortalityadjusted annuities, as we describe payments from the pooled fund are variable annuities in which aggregate mortality risk is transferred from the seller of annuitees to the annuitants. If annuitants are risk averse the payments from the fund should be adjusted to reflect this. We show how the adjustment can be calculated and compare the payment profiles from a risk-adjusted funds with alternatives which either ignore uncertainty completely or take account of the uncertainty but assume that annuitants are not risk averse. It is shown that, even for very risk averse annuitants, initial payments are reduced only slightly to provide acceptable insurance against the implications of uncertainty about future mortality rates.