Seminario académico de Finanzas y Contabilidad

23 de mayo, 13:00 horas, sala P302, Facultad de Economía y Negocios

Expositor: Jaime Casassus

Abstract

The Money’s Worth Ratio (MWR) measures an annuity’s actuarial fairness. It is calculated as the ratio of the present value of expected future payments to the cost of the annuity. We argue that this measure is likely to overestimate the value-for-money obtained by annuitants since it does not consider illiquidity premia and insurer default risk, which is borne by annuity holders if there are no government guarantees. We propose a multi-factor solution for an adjusted MWR (AMWR) that accounts for illiquidity and default risk. The adjustments proposed in this paper are represented by two multipliers, the liquidity and the credit risk factors, that are intuitive and in closed-form solutions. Valuing the default option requires detailed knowledge of the joint probability distribution of the asset and liability returns of each insurer. We also obtain implied credit spreads and asset insuciency probabilities for the annuity providers. We use our model to analyze the competitive Chilean annuity market, which offers MWRs above 1, finding that indeed these ratios are biased upward 7 percent on average, with wide dispersion.