INTRODUCTION

The insurance industry is an institution that reduces the risks of economic and financial loss that individuals and businesses confront in the daily business of life by pooling them. Property and casualty insurance pools the risk of catastrophic loss faced by business and property owners, and by doing so reduces a prohibitive risk to a manageable one. Life insurance pools the risks associated with death, and in particular the risk of loss of income that the death of a breadwinner entails to reduce the economic insecurity that families confront.

The life annuity branch of the life insurance business pools the risk of excessive longevity. If a market for life annuities is to develop and function effectively, two conditions must be met. First, annuity providers must have a reasonably large number of annuity policy holders, and the group's life expectancy must be predictable with some accuracy. Second, annuity providers need investment vehicles that will generate a cash flow that matches the expected future stream of payments to annuitants.

Life insurance companies have traditionally monopolized the sales of annuities to the private market, because the actuarial skills and financial acumen required to price and fund life insurance contracts are the same as those required to price and fund annuities. A lesser reason is that the sale of annuity contracts can be a partial hedge against the mortality risks that life insurers face.