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Optimum and Risk-Class Pricing of Annuities

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  • Eytan Sheshinski

Abstract

When information on longevity (survival functions) is unknown early in life, individuals have an interest in insuring themselves against moving into different 'risk-classes' as their life expectancy is revealed. The "First-Best" allocation involves transfers across states of nature. With symmetric information, competitive equilibrium separates different risk classes and cannot provide such transfers because insurance firms are unable to "precommit". When utility is invariant to risk-class realisation, the optimum entails uniform consumption and optimum retirement age independent of risk-class and an optimum social security scheme is superior to competitive equilibrium. When preferences depend on risk-class, welfare ranking of systems becomes indeterminate. Copyright 2007 The Author(s). Journal compilation Royal Economic Society 2007.

Suggested Citation

  • Eytan Sheshinski, 2007. "Optimum and Risk-Class Pricing of Annuities," Economic Journal, Royal Economic Society, vol. 117(516), pages 240-251, January.
  • Handle: RePEc:ecj:econjl:v:117:y:2007:i:516:p:240-251
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    Cited by:

    1. Wenan Fei & Claude Fluet & Harris Schlesinger, 2015. "Uncertain Bequest Needs and Long-Term Insurance Contracts," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 82(1), pages 125-148, March.
    2. Nan Zhu & Daniel Bauer, 2013. "Coherent Pricing of Life Settlements Under Asymmetric Information," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 80(3), pages 827-851, September.
    3. Thomas Post, 2009. "Individual Welfare Gains from Deferred Life-Annuities under Stochastic Lee-Carter Mortality," SFB 649 Discussion Papers SFB649DP2009-022, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    4. Steinorth, Petra, 2012. "The demand for enhanced annuities," Journal of Public Economics, Elsevier, vol. 96(11), pages 973-980.

    More about this item

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • 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

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