Mitchell et al. Flashcards
(9 cards)
How does their process of valuation differ from previous work on annuities valuation?
- Values single life annuitites for a wider range of aages than previous studies and also values joint and survivor probabilities
- Allows for term structure of interest rates rather than single long term interest rates to value payouts (included a term structure for risky bonds)
- Also recognises the impact of uncertain inflation as well
What kind of annuity did they focus on?
They focused on SPIAs - Single Premium Immediate Annuities
What mortality tables did they use - period or cohort? And why?
They used cohort tables as this would reflect the probabilities that a rational forward looking individual would likely apply in making his decision concerning the purchase of an annuity
What were their findings relating to adverse selection?
That for the average individual, adverse selection seems to explain roughly half of the disparity between expected discounted present value of annuity payours and the cost of an individual annuity.
How did the EPDV compare over the period of analysis?
The value of per premium dollar grew roughly 8 percentage points
What was the benchmark MW that still have individuals still prefer to purchase the annuity rather than pursue a optimal consumption strategy without such insurance products?
They found that even if the EPDV calculations yielded only 0.75 per dollar of premium payment, individuals would still prefer to purchase the annuity.
Hence they cannot show that transaction costs are the reason for low demand.
What data did Mitchell et al use?
Thet used data on the value of individual life annuities available on the private market in 1995.
What did they find upon their review of prices for a single premium life annuity?
That the prices charged for a single premium annuity varies widely, close to 20%, and this dispersion varies by both age and the sex of the insured.
