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Issues in the Issuance of Enhanced Annuities

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  • Robert L. Brown
  • Patricia Scahill

Abstract

Two forces are about to create a growing market for Individual Annuities in the U. S. and Canada. First, the Post War Baby Boom (born 1946 to 1964) is inexorably moving into retirement. Second, there is a strong move away from Employer-sponsored Defined Benefit pension plans to Defined Contribution pension plans. This trend could even extend (in the U.S.) into the provision of Social Security benefits. Under these arrangements, participants must find a way to mitigate their “longevity” risk (and the investment risk, although this is not the topic of this paper). The most obvious answer is to buy a life annuity. However, at this time in the U. S. and Canada, persons who voluntarily apply to buy a life annuity are generally assumed to be in extremely good health and annuity rates are determined using very low mortality assumptions (high life expectancy assumptions). While there is a growing market in “Enhanced/Impaired Annuities”, especially in the U.K., the present pricing structure for annuities in the U. S. and Canada means that a large proportion of the population cannot get a “fair value” annuity given their less-than-preferred health profile. This paper looks at reasons for this market reality in the U. S. and Canada. It also reviews the underwriting and marketing of life annuities in the United Kingdom where “enhanced” life annuities are available for a broader cross-section of the marketplace.

Suggested Citation

  • Robert L. Brown & Patricia Scahill, 2010. "Issues in the Issuance of Enhanced Annuities," Social and Economic Dimensions of an Aging Population Research Papers 265, McMaster University.
    • Handle: RePEc:mcm:sedapp:265
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    File URL: http://socserv.mcmaster.ca/sedap/p/sedap265.pdf
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    References listed on IDEAS

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    1. Angus S. Deaton & Christina Paxson, 2001. "Mortality, Education, Income, and Inequality among American Cohorts," NBER Chapters, in: Themes in the Economics of Aging, pages 129-170, National Bureau of Economic Research, Inc.
    2. repec:pri:cheawb:deaton_paxson_mortality_cohorts.pdf is not listed on IDEAS
    3. Bucher, H.C. & Ragland, D.R., 1995. "Socioeconomic indicators and mortality from coronary heart disease and cancer: A 22-year follow-up of middle-aged men," American Journal of Public Health, American Public Health Association, vol. 85(9), pages 1231-1236.
    4. Robert Brown & Joanne McDaid, 2003. "Factors Affecting Retirement Mortality," North American Actuarial Journal, Taylor & Francis Journals, vol. 7(2), pages 24-43.
    5. repec:pri:cheawb:deaton_paxson_mortality_cohorts is not listed on IDEAS
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    Cited by:

    1. Sutcliffe, Charles, 2015. "Trading death: The implications of annuity replication for the annuity puzzle, arbitrage, speculation and portfolios," International Review of Financial Analysis, Elsevier, vol. 38(C), pages 163-174.
    2. Chen, An & Fuino, Michel & Sehner, Thorsten & Wagner, Joël, 2022. "Valuation of long-term care options embedded in life annuities," Annals of Actuarial Science, Cambridge University Press, vol. 16(1), pages 68-94, March.

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    More about this item

    Keywords

    Individual Annuities; Defined Benefit Pension Plan; Defined Contribution Pension Plan; Retirement Income Security; Life Expectancy; Impaired Mortality;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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