Annuitites Flashcards
(12 cards)
What is an annuity?
A stream of payments paid to people each month (or year), typically lasting until death, providing insurance agains tthe risk of outliving one’s savings
What is an actuarially fair annuity?
An annuity where the price equals the present value of future payments.
What is a loading factor in annuities?
A markup over the actuarially fair price that reflects administrative costs, corporate taxes and potentially market power.
What is the “money’s worth’ ratio for annuities?
The ratio of the expected present discounted value of the annuity to the price of the annuity. In a simple model with loading factor δ, it equals 1/(1+δ).
What is the most common test for adverse selection in insurance markets?
The “positive correlation test” - testing for positive correlation between risk characteristics and probability of purchasing insurance.
How does compulsory annuitization affect adverse selection?
Compulsory annuitization reduces adverse selection
What is active versus passive selection in annuity markets?
Active selection: people who expect to live long buy annuities because they get a good deal. Passive selection: selection on attributes correlated with mortality (e.g., rich people live longer and have greater demand for annuities).
How does single pricing of annuities lead to redistribution?
Single pricing (price just a function of age) leads to redistribution from short-lived to long-lived groups: poor to rich, men to women, unhealthy to healthy, and racial minorities to whites.
What has been observed in the UK annuity market after mandatory annuitization was abolished?
The market has declined by approximately 75% since the end of mandatory annuitization.
