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Prices of standard annuity products in the United States do not currently reflect buyers’ personal characteristics other than age and sex. I show that several readily-measurable risk factors can significantly increase explained variability in mortality outcomes in a proportional hazards framework and use them to construct alternative pricing schemes. Simulation results show that more detailed pricing may help reduce adverse selection in annuity markets because shorter-lived groups are made much better off (and thus enter the market) while longer-lived groups are made only slightly worse off (and thus remain in the market).
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Opinions and errors are solely those of the authors and not of the institutions providing funding for this study or with which the authors are affiliated. Copyright 2011 ©Pension Research Council of the Wharton School of the University of Pennsylvania. All rights reserved.
Date Posted: 28 June 2019