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Endowment contingency funds for mutual aid and public financing

Author

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  • Denuit, Michel

    (Université catholique de Louvain, LIDAM/ISBA, Belgium)

  • Robert, Christian Y.

Abstract

This paper explores a new risk-sharing vehicle, called endowment contingency fund. It targets groups of individuals exposed to the occurrence of a predefined event with adverse financial consequences such as death, survival or being diagnosed with a critical illness for instance. All members of the group agree to contribute in advance a fixed amount to a pool constituted over a reference period with the understanding that the sum of the contributions is shared in arrear among those participants having experienced the predefined event. This allocation is either uniform among claiming participants, each one receiving an equal share of total contributions, or participants are offered the choice to select a desired protection level. In the latter case, participants are free to subscribe one or several units of protection from the fund, and the total amount collected in advance is shared in arrear, equally among all units held by those participants who experienced the predefined event. Endowment contingency funds aim to provide participants with a cheap and effective protection compared to commercial insurance. The reason is that the proposed system is fully funded so that there is no risk borne by the organizer. The benefits in case the event occurs are therefore random but the volatility of the terminal payouts turns out to be limited when the number of participants gets large enough. Under independence, insurance at fair price is recovered at the limit, within infinitely large pools. As an application, the paper considers mutual aid funds and survivor funds. Several related issues are discussed, including a comparison with takaful insurance as well as the inclusion of minimum guarantees to make the system more attractive.

Suggested Citation

  • Denuit, Michel & Robert, Christian Y., 2023. "Endowment contingency funds for mutual aid and public financing," LIDAM Discussion Papers ISBA 2023009, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    • Handle: RePEc:aiz:louvad:2023009
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    References listed on IDEAS

    as
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    8. Denuit, Michel & Hieber, Peter & Robert, Christian Y., 2022. "Mortality credits within large survivor funds," LIDAM Reprints ISBA 2022030, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
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    17. Zhanyi Jiao & Steven Kou & Yang Liu & Ruodu Wang, 2022. "An axiomatic theory for anonymized risk sharing," Papers 2208.07533, arXiv.org, revised May 2023.
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    20. Denuit, Michel & Robert, Christian Y., 2022. "Collaborative Insurance with Stop-Loss Protection and Team Partitioning," LIDAM Reprints ISBA 2022014, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    21. Olivieri, Annamaria & Pitacco, Ermanno, 2020. "Linking annuity benefits to the longevity experience: alternative solutions," Annals of Actuarial Science, Cambridge University Press, vol. 14(2), pages 316-337, September.
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    26. Yikang Li & Casey Rothschild, 2020. "Selection and Redistribution in the Irish Tontines of 1773, 1775, and 1777," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 87(3), pages 719-750, September.
    27. Michel Denuit & Christian Y. Robert, 2022. "Collaborative Insurance with Stop-Loss Protection and Team Partitioning," North American Actuarial Journal, Taylor & Francis Journals, vol. 26(1), pages 143-160, January.
    28. Abdikerimova, Samal & Feng, Runhuan, 2022. "Peer-to-peer multi-risk insurance and mutual aid," European Journal of Operational Research, Elsevier, vol. 299(2), pages 735-749.
    29. Donnelly, Catherine & Guillén, Montserrat & Nielsen, Jens Perch, 2013. "Exchanging uncertain mortality for a cost," Insurance: Mathematics and Economics, Elsevier, vol. 52(1), pages 65-76.
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    1. Jan L. M. Dhaene & Moshe A. Milevsky, 2024. "Egalitarian pooling and sharing of longevity risk', a.k.a. 'The many ways to skin a tontine cat," Papers 2402.00855, arXiv.org.

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    Keywords

    Risk pooling ; Conditional mean risk-sharing ; Actuarial fairness ; Mutual inheritance ; Insurance at fair price;
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