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Intergenerational Effects of Guaranteed Pension Contracts

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  • Trond M D�skeland

    ()
    (Department of Finance and Management Science, Norwegian School of Economics and Business Administration, Helleveien 30, Bergen 5045, Norway.)

  • Helge A Nordahl

    ()
    (Department of Finance and Management Science, Norwegian School of Economics and Business Administration, Helleveien 30, Bergen 5045, Norway.)

Abstract

In this paper we show that there exist intergenerational cross-subsidization effects in guaranteed interest rate life and pension contracts as the different generations partially share the same reserves. Early generations build up bonus reserves, which are left with the company at expiry of the contract. These bonus reserves function partly as a subsidy of later generations, such that the latter earn a risk-adjusted return above the risk-free rate. Furthermore, we show that this subsidy may be large enough to explain why late generations buy guaranteed interest rate products, which otherwise would not have been part of the optimal portfolio allocation. The Geneva Risk and Insurance Review (2008) 33, 19–46. doi:10.1057/grir.2008.3

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Article provided by Palgrave Macmillan in its journal The Geneva Risk and Insurance Review.

Volume (Year): 33 (2008)
Issue (Month): 1 (June)
Pages: 19-46

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Handle: RePEc:pal:genrir:v:33:y:2008:i:1:p:19-46

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  1. Robert M. Dammon & Chester S. Spatt & Harold H. Zhang, 2004. "Optimal Asset Location and Allocation with Taxable and Tax-Deferred Investing," Journal of Finance, American Finance Association, vol. 59(3), pages 999-1037, 06.
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  3. Rui Yao, 2005. "Optimal Consumption and Portfolio Choices with Risky Housing and Borrowing Constraints," Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 197-239.
  4. Joao F. Cocco, 2005. "Consumption and Portfolio Choice over the Life Cycle," Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 491-533.
  5. Døskeland, Trond M. & Nordahl, Helge A., 2006. "Optimal Pension Insurance Design," Discussion Papers 2006/14, Department of Business and Management Science, Norwegian School of Economics, revised 21 Jun 2007.
  6. Bjarne Astrup Jensen & Carsten Sørensen, 2001. "Paying for Minimum Interest Rate Guarantees: Who Should Compensate Who?," European Financial Management, European Financial Management Association, vol. 7(2), pages 183-211.
  7. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-57, August.
  8. Gomes, Francisco J & Michaelides, Alexander, 2005. "Optimal Life-Cycle Asset Allocation: Understanding the Empirical Evidence," CEPR Discussion Papers 4853, C.E.P.R. Discussion Papers.
  9. Consiglio, Andrea & Saunders, David & Zenios, Stavros A., 2006. "Asset and liability management for insurance products with minimum guarantees: The UK case," Journal of Banking & Finance, Elsevier, vol. 30(2), pages 645-667, February.
  10. Michael J. Brennan, 1993. "Aspects of Insurance, Intermediation and Finance*," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 18(1), pages 7-30, June.
  11. Grosen, Anders & Lochte Jorgensen, Peter, 2000. "Fair valuation of life insurance liabilities: The impact of interest rate guarantees, surrender options, and bonus policies," Insurance: Mathematics and Economics, Elsevier, vol. 26(1), pages 37-57, February.
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Cited by:
  1. Bohnert, Alexander & Gatzert, Nadine, 2012. "Analyzing surplus appropriation schemes in participating life insurance from the insurer’s and the policyholder’s perspective," Insurance: Mathematics and Economics, Elsevier, vol. 50(1), pages 64-78.
  2. Goecke, Oskar, 2013. "Pension saving schemes with return smoothing mechanism," Insurance: Mathematics and Economics, Elsevier, vol. 53(3), pages 678-689.

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