publication . Preprint . 2013

Adjusted Money's Worth Ratios in Life Annuities

Jaime Casassus; Eduardo Walker;
Open Access
  • Published: 01 Jan 2013
The Money's Worth Ratio (MWR) measures an annuity's actuarial fairness. It is calculated as the discounted present value of expected future payments divided by its cost. We argue that from the perspective of annuitants, this measure may overestimate the value-for-money obtained, since it does not adjust for liquidity or risk factors. Measuring these factors is challenging, requiring detailed knowledge of assets, liabilities, and of the stochastic processes followed by them. Using a multi-factor continuous-time model, we propose a simple solution for an adjusted MWR (AMWR), which does consider illiquidity and default risk. We implement this solution for the compe...
free text keywords: money's worth ratios, annuities, insurance companies, credit risk, liquidity premium, default probability, multi-factor continuous time models, emerging markets, Chile, jel:G22, jel:G13, jel:G28
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