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Lifecycle Portfolio Choice With Systematic Longevity Risk and Variable Investment—Linked Deferred Annuities

Author

Listed:
  • Raimond Maurer
  • Olivia S. Mitchell
  • Ralph Rogalla
  • Vasily Kartashov

Abstract

This paper assesses the impact of variable investment-linked deferred annuities (VILDAs) on lifecycle consumption, saving, and portfolio allocation patterns given stochastic and systematic mortality. Insurers have taken two approaches to manage systematic mortality risks, namely self-insurance and risk transfer to purchasers of the annuity products. We demonstrate that self-insurance leads to high loadings, so that households offered a choice would favor the risk transfer scheme. Reservation loadings on the actuarially fair VILDA price for non-participation are 0.5-8%; if insurers cannot hedge within this range, they will transfer systematic longevity risks to the annuitants. Our findings have implications for new payout products that may be attractive to older households seeking to protect against retirement shortfalls.
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Suggested Citation

  • Raimond Maurer & Olivia S. Mitchell & Ralph Rogalla & Vasily Kartashov, 2013. "Lifecycle Portfolio Choice With Systematic Longevity Risk and Variable Investment—Linked Deferred Annuities," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 80(3), pages 649-676, September.
  • Handle: RePEc:bla:jrinsu:v:80:y:2013:i:3:p:649-676
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    File URL: http://hdl.handle.net/10.1111/j.1539-6975.2012.01502.x
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    References listed on IDEAS

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    1. Brown, Jeffrey R. & Mitchell, Olivia S. & Poterba, James M. & Warshawsky, Mark J., 2001. "The Role of Annuity Markets in Financing Retirement," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262529130.
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    8. Horneff, Wolfram J. & Maurer, Raimond H. & Mitchell, Olivia S. & Stamos, Michael Z., 2010. "Variable payout annuities and dynamic portfolio choice in retirement," Journal of Pension Economics and Finance, Cambridge University Press, pages 163-183.
    9. Weil, Roman L & Fisher, Lawrence, 1974. "TIAA/CREF: Who Gets What? An Analysis of Wealth Transfers in a Variable Annuity," The Journal of Business, University of Chicago Press, vol. 47(1), pages 67-87, January.
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    11. Horneff, Wolfram & Maurer, Raimond & Rogalla, Ralph, 2010. "Dynamic portfolio choice with deferred annuities," Journal of Banking & Finance, Elsevier, vol. 34(11), pages 2652-2664, November.
    12. Andrew J. G. Cairns & David Blake & Kevin Dowd, 2006. "A Two-Factor Model for Stochastic Mortality with Parameter Uncertainty: Theory and Calibration," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(4), pages 687-718.
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    14. Milevsky, Moshe A. & David Promislow, S., 2001. "Mortality derivatives and the option to annuitise," Insurance: Mathematics and Economics, Elsevier, pages 299-318.
    15. Horneff, Wolfram J. & Maurer, Raimond H. & Mitchell, Olivia S. & Stamos, Michael Z., 2009. "Asset allocation and location over the life cycle with investment-linked survival-contingent payouts," Journal of Banking & Finance, Elsevier, vol. 33(9), pages 1688-1699, September.
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    Cited by:

    1. Maurer, Raimond & Mitchell, Olivia S. & Rogalla, Ralph & Siegelin, Ivonne, 2016. "Accounting and actuarial smoothing of retirement payouts in participating life annuities," Insurance: Mathematics and Economics, Elsevier, pages 268-283.
    2. Horneff, Vanya & Maurer, Raimond & Mitchell, Olivia S. & Rogalla, Ralph, 2015. "Optimal life cycle portfolio choice with variable annuities offering liquidity and investment downside protection," Insurance: Mathematics and Economics, Elsevier, pages 91-107.
    3. Horneff, Vanya & Kaschützke, Barbara & Maurer, Raimond & Rogalla, Ralph, 2014. "Welfare implications of product choice regulation during the payout phase of funded pensions," Journal of Pension Economics and Finance, Cambridge University Press, pages 272-296.
    4. Kwok, Kai Yin & Chiu, Mei Choi & Wong, Hoi Ying, 2016. "Demand for longevity securities under relative performance concerns: Stochastic differential games with cointegration," Insurance: Mathematics and Economics, Elsevier, pages 353-366.
    5. Hanewald, Katja & Piggott, John & Sherris, Michael, 2013. "Individual post-retirement longevity risk management under systematic mortality risk," Insurance: Mathematics and Economics, Elsevier, pages 87-97.
    6. repec:eee:hapoch:v1_567 is not listed on IDEAS
    7. Francesco Menoncin & Luca Regis, 2015. "Longevity assets and pre-retirement consumption/portfolio decisions," Working Papers 2/2015, IMT Institute for Advanced Studies Lucca, revised May 2015.
    8. Steinorth, Petra & Mitchell, Olivia S., 2015. "Valuing variable annuities with guaranteed minimum lifetime withdrawal benefits," Insurance: Mathematics and Economics, Elsevier, pages 246-258.
    9. Felix Reichling & Kent Smetters, 2013. "Optimal Annuitization with Stochastic Mortality Probabilities: Working Paper 2013-05," Working Papers 44374, Congressional Budget Office.
    10. repec:eee:insuma:v:76:y:2017:i:c:p:75-86 is not listed on IDEAS
    11. Horneff, Vanya & Maurer, Raimond & Mitchell, Olivia S., 2016. "Putting the pension back in 401(k) plans: Optimal versus default longevity income annuities," SAFE Working Paper Series 150, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    12. Schendel, Lorenz S., 2014. "Consumption-investment problems with stochastic mortality risk," SAFE Working Paper Series 43, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    13. Maurer, Raimond & Mitchell, Olivia S. & Rogalla, Ralph & Siegelin, Ivonne, 2016. "Accounting and actuarial smoothing of retirement payouts in participating life annuities," Insurance: Mathematics and Economics, Elsevier, pages 268-283.
    14. Horneff, Vanya & Maurer, Raimond & Mitchell, Olivia S., 2016. "Putting the pension back in 401(k) plans: Optimal versus default longevity income annuities," SAFE Working Paper Series 150, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.

    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G2 - Financial Economics - - Financial Institutions and Services
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty

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