Actuarial fairness and solidarity in pooled annuity funds
AbstractVarious types of structures that enable a group of individuals to pool their mortality risk have been proposed in the literature. Collectively, the structures are called pooled annuity funds. Since the pooled annuity funds propose different methods of pooling mortality risk, we investigate the connections between them and find that they are genuinely different for a finite heterogeneous membership profile. We discuss the importance of actuarial fairness, defined as the expected benefits equalling the contributions for each member, in the context of pooling mortality risk and comment on whether actuarial unfairness can be seen as solidarity between members. We show that, with a finite number of members in the fund, the group self-annuitization scheme is not actuarially fair: some members subsidize the other members. The implication is that the members who are subsidizing the others may obtain a higher expected benefit by joining a fund with a more favourable membership profile. However, we find that the subsidies are financially significant only for very small or highly heterogeneous membership profiles.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1311.5120.
Date of creation: Nov 2013
Date of revision: Jul 2014
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-11-29 (All new papers)
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- Hanewald, Katja & Piggott, John & Sherris, Michael, 2013.
"Individual post-retirement longevity risk management under systematic mortality risk,"
Insurance: Mathematics and Economics,
Elsevier, vol. 52(1), pages 87-97.
- Katja Hanewald & John Piggott & Michael Sherris, 2011. "Individual Post-Retirement Longevity Risk Management Under Systematic Mortality Risk," Working Papers 201113, ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales.
- 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, vol. 72(3), pages 497-520.
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