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Government-provided annuities under insolvency risk

  • Huang, Rachel J.
  • Tsai, Jeffrey T.
  • Tzeng, Larry Y.

This paper seeks to determine whether governments should intervene in the private annuity market by directly providing public insurance in the form of annuities when both the government and the insurance companies could default. It is found that, although the government could default, intervening by means of an annuity can improve social welfare if the insurance companies could default and the expected return on the public annuity is greater than the rate of return on a risk-free bond. We also find that, under actuarially fair pricing, the government should provide more in terms of a public annuity than the optimal amount of the annuity that the individual purchases in the private market if the government is less likely to default on the public annuity than an insurance company would in the case of a private annuity.

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File URL: http://www.sciencedirect.com/science/article/pii/S0167-6687(07)00119-9
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Article provided by Elsevier in its journal Insurance: Mathematics and Economics.

Volume (Year): 43 (2008)
Issue (Month): 3 (December)
Pages: 377-385

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Handle: RePEc:eee:insuma:v:43:y:2008:i:3:p:377-385
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505554

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