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Unit-Linked Tontine: Utility-Based Design, Pricing and Performance

Author

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  • An Chen

    (Institute of Insurance Science, University of Ulm, Helmholtzstrasse 20, 89069 Ulm, Germany)

  • Thai Nguyen

    (École d’Actuariat, Université Laval, 2425, rue de l’Agriculture, Quebec, QC G1V 0A6, Canada)

  • Thorsten Sehner

    (Institute of Insurance Science, University of Ulm, Helmholtzstrasse 20, 89069 Ulm, Germany)

Abstract

Due to the low demand for conventional annuities, alternative retirement products are sought. Quite recently, tontines have been frequently brought up as a promising option in this respect. Inspired by unit-linked life insurance and retirement products, we introduce unit-linked tontines in this article, where the tontine payoffs are directly linked to the development of the underlying financial market. More specifically, we consider two different tontine payoff structures differing in the (non-)inclusion of guaranteed payments. We first price the unit-linked tontines by using the risk-neutral pricing approach. Consequently, we study the attractiveness of these products for a utility-maximizing policyholder and compare them with non-unit-linked tontines. Our numerical analysis sheds light on the design challenges and gives explanations why similar products might not be widely adopted already.

Suggested Citation

  • An Chen & Thai Nguyen & Thorsten Sehner, 2022. "Unit-Linked Tontine: Utility-Based Design, Pricing and Performance," Risks, MDPI, vol. 10(4), pages 1-27, April.
    • Handle: RePEc:gam:jrisks:v:10:y:2022:i:4:p:78-:d:788706
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    References listed on IDEAS

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