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Working Paper

Beyond Age and Sex: Enhancing Annuity Pricing

Joelle HY. Fong
WP2011-05

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Abstract — 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).