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Government-provided annuities under insolvency risk

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Author Info

  • Huang, Rachel J.
  • Tsai, Jeffrey T.
  • Tzeng, Larry Y.

Abstract

This paper seeks to determine whether governments should intervene in the private annuity market by directly providing public insurance in the form of annuities when both the government and the insurance companies could default. It is found that, although the government could default, intervening by means of an annuity can improve social welfare if the insurance companies could default and the expected return on the public annuity is greater than the rate of return on a risk-free bond. We also find that, under actuarially fair pricing, the government should provide more in terms of a public annuity than the optimal amount of the annuity that the individual purchases in the private market if the government is less likely to default on the public annuity than an insurance company would in the case of a private annuity.

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Bibliographic Info

Article provided by Elsevier in its journal Insurance: Mathematics and Economics.

Volume (Year): 43 (2008)
Issue (Month): 3 (December)
Pages: 377-385

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Handle: RePEc:eee:insuma:v:43:y:2008:i:3:p:377-385

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Web page: http://www.elsevier.com/locate/inca/505554

Related research

Keywords: Annuity puzzle Optimal annuitization Insolvency risk Public annuity;

References

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Cited by:
  1. Thomas Post, 2009. "Individual Welfare Gains from Deferred Life-Annuities under Stochastic Lee-Carter Mortality," SFB 649 Discussion Papers SFB649DP2009-022, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.

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