Does Rapid Mortality Improvement Resolve the Annuity Puzzle?: Evidence from South Korea

Motivated by South Korea’s rapid improvement in the mortality rate, we analyze the actuarial fairness of annuity products for the general population and shed light on the annuity puzzle in South Korea. To consider the effect of mortality improvement more accurately, we apply a stochastic mortality model to estimate future mortality rates and the money’s worth ratio (MWR) to evaluate the actuarial fairness of annuity products. Our results indicate that annuity products in South Korea remain unattractive to the general population owing to adverse selection, despite significant improvements in mortality rates. Furthermore, we find that the impact of adverse selection is greater for males, resulting in lower annuity product values than for females. Additionally, for the general Korean population, the payout guarantee option of annuity products improves the MWR with increasing age, despite the associated guarantee costs.