Longevity Risk and Annuity Pricing in Nigeria’s Emerging Retirement Income Market

This study investigates longevity risk and its implications for annuity product pricing in Nigeria's emerging retirement income market. As the contributory pension scheme matures and the first substantial cohorts of retirees begin drawing down accumulated savings, the demand for life annuities as a retirement income product is expected to grow. However, longevity risk, the risk that annuitants live significantly longer than assumed in pricing models, poses a major financial challenge for life insurers entering the annuity market. This study uses mortality data from the National Population Commission, CBN investment return data, and published annuity rates from four life insurers offering programmed withdrawal and life annuity products for the period 2020 to 2023. Longevity projections using the Lee-Carter mortality forecasting model are applied to assess the adequacy of current annuity pricing mortality assumptions. Stress testing examines financial impact under optimistic longevity scenarios. Findings reveal that current annuity pricing models in Nigeria do not adequately incorporate future mortality improvement, particularly for urban professional cohorts who are expected to experience accelerating longevity gains. Under a moderate longevity improvement scenario, insurer reserves could be understated by 12 to 18 percent. The study concludes that longevity risk is a materially underestimated liability in Nigerian annuity pricing. It recommends that NAICOM require explicit mortality improvement loading in all annuity product pricing submissions and develop a national annuitant mortality table.

Keywords: longevity risk, annuity pricing, retirement income, mortality improvement, Lee-Carter model.