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Exchanging uncertain mortality for a cost

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  • Donnelly, Catherine
  • Guillén, Montserrat
  • Nielsen, Jens Perch

Abstract

We analyze a pooled annuity fund from a participant’s perspective by comparing it to a mortality-linked fund, a type of variable payout life annuity, that gives a return linked to the force of mortality but subject to a cost. Fixing the instantaneous volatility of return on wealth, we find that the expected return on the pooled annuity fund is higher except when the costs are very low in the mortality-linked fund. Similar results are obtained when maximizing the expected lifetime utility of consumption, assuming a constant relative risk aversion utility function. In both settings, our results indicate that a participant may be willing to accept the mortality risk of the pooled annuity fund, even when only 100 individuals are pooling their mortality in the pooled annuity fund.

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Bibliographic Info

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

Volume (Year): 52 (2013)
Issue (Month): 1 ()
Pages: 65-76

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Handle: RePEc:eee:insuma:v:52:y:2013:i:1:p:65-76

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

Related research

Keywords: Longevity risk; Pensions; Pooled annuity fund;

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References

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  1. Olivia S. Mitchell, 1999. "New Evidence on the Money's Worth of Individual Annuities," American Economic Review, American Economic Association, American Economic Association, vol. 89(5), pages 1299-1318, December.
  2. Alexander Braun & Nadine Gatzert & Hato Schmeiser, 2012. "Performance and Risks of Open‐End Life Settlement Funds," Journal of Risk & Insurance, The American Risk and Insurance Association, The American Risk and Insurance Association, vol. 79(1), pages 193-230, 03.
  3. John Piggott & Emiliano A. Valdez & Bettina Detzel, 2005. "The Simple Analytics of a Pooled Annuity Fund," Journal of Risk & Insurance, The American Risk and Insurance Association, The American Risk and Insurance Association, vol. 72(3), pages 497-520.
  4. Stamos, Michael Z., 2008. "Optimal consumption and portfolio choice for pooled annuity funds," Insurance: Mathematics and Economics, Elsevier, Elsevier, vol. 43(1), pages 56-68, August.
  5. Lee Lockwood, 2012. "Bequest Motives and the Annuity Puzzle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 226-243, April.
  6. Vittas, Dimitri, 2011. "The mechanics and regulation of variable payout annuities," Policy Research Working Paper Series, The World Bank 5762, The World Bank.
  7. Valdez, Emiliano A. & Piggott, John & Wang, Liang, 2006. "Demand and adverse selection in a pooled annuity fund," Insurance: Mathematics and Economics, Elsevier, Elsevier, vol. 39(2), pages 251-266, October.
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Cited by:
  1. Donnelly, Catherine & Guillén, Montserrat & Nielsen, Jens Perch, 2014. "Bringing cost transparency to the life annuity market," Insurance: Mathematics and Economics, Elsevier, Elsevier, vol. 56(C), pages 14-27.

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