The American Risk and Insurance Association presents the Robert I. Mehr Award each year for the paper published ten years ago in The Journal of Risk and Insurance that has best stood the test of time. The evaluation of the articles is made by the editorial board of JRI.
The recipients of the 2011 Mehr Award were David Blake, City University London, and William Burrows, Better Retirement Group Ltd., London, for “Survivor Bonds: Helping to Hedge Mortality Risk,” JRI, June 2001, Vol. 68 #2, pp. 339-348.
One of the key problems facing annuity providers is mortality risk, the risk of underestimating mortality improvements. The authors argue that the government could help the issuers of annuities to hedge aggregate mortality risk by introducing a new type of bond, which the authors call a survivor bond. The future coupons on this bond depend on the percentage of the population of retirement age on the issue date who are still alive on the future coupon payment dates. The coupons on the bond therefore decline over time but continue in payment until the last members of this population cohort have died. The government would therefore be assuming a risk that has hitherto been borne by the private sector. However, governments now issue inflation-indexed bonds, and the authors would argue that inflation risk is a much greater risk than mortality risk in aggregate. Furthermore, governments directly contribute to mortality risk: for example, they promote public health campaigns that, if successful, lead to mortality improvements that are difficult to predict many years ahead. Survivor bonds enable pension provision to be a shared responsibility between the public and private sectors.