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Accounting and actuarial smoothing of retirement payouts in participating life annuities

Author

Listed:
  • Maurer, Raimond
  • Mitchell, Olivia S.
  • Rogalla, Ralph
  • Siegelin, Ivonne

Abstract

Life insurers use accounting and actuarial techniques to smooth reporting of firm assets and liabilities, seeking to transfer surpluses in good years to cover benefit payouts in bad years. Yet these techniques have been criticized as they make it difficult to assess insurers’ true financial status. We develop stylized and realistically-calibrated models of a participating life annuity, an insurance product that pays retirees guaranteed lifelong benefits along with variable non-guaranteed surplus. Our goal is to illustrate how accounting and actuarial techniques for this type of financial contract shape policyholder wellbeing, along with insurer profitability and stability. Smoothing adds value to both the annuitant and the insurer, so curtailing smoothing could undermine the market for long-term retirement payout products.

Suggested Citation

  • 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, vol. 71(C), pages 268-283.
    • Handle: RePEc:eee:insuma:v:71:y:2016:i:c:p:268-283
    DOI: 10.1016/j.insmatheco.2016.09.007
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    1. Maurer, Raimond & Mitchell, Olivia S. & Rogalla, Ralph & Siegelin, Ivonne, 2015. "Accounting-based asset return smoothing in participating life annuities: Implications for annuitants, insurers, and policymakers," CFS Working Paper Series 518, Center for Financial Studies (CFS).
    2. Vanya Horneff & Raimond Maurer & Olivia S. Mitchell, 2023. "Fixed and variable longevity income annuities in defined contribution plans: Optimal retirement portfolios taking social security into account," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 90(4), pages 831-860, December.
    3. Olivia S. Mitchell, 2018. "Enhancing risk management for an aging world," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 43(2), pages 115-136, September.
    4. Vanya Horneff & Raimond Maurer & Olivia S. Mitchell, 2023. "Fixed and Variable Longevity Annuities in Defined Contribution Plans: Optimal Retirement Portfolios Taking Social Security into Account," NBER Working Papers 30853, National Bureau of Economic Research, Inc.
    5. Antje Mahayni & Matthias Muck, 2017. "The benefit of life insurance contracts with capped index participation when stock prices are subject to jump risk," Review of Derivatives Research, Springer, vol. 20(3), pages 281-308, October.
    6. van Bilsen, Servaas & Bovenberg, Lans, 2016. "Personal Pensions with Risk Sharing : Various Approaches," Other publications TiSEM 654af00d-ba4f-44e6-a4ad-c, Tilburg University, School of Economics and Management.
    7. Servaas van Bilsen & Roger J. A. Laeven & Theo E. Nijman, 2020. "Consumption and Portfolio Choice Under Loss Aversion and Endogenous Updating of the Reference Level," Management Science, INFORMS, vol. 66(9), pages 3927-3955, September.
    8. van Bilsen, Servaas & Laeven, Roger J.A., 2020. "Dynamic consumption and portfolio choice under prospect theory," Insurance: Mathematics and Economics, Elsevier, vol. 91(C), pages 224-237.
    9. Bovenberg, Lans & Nijman, Theo, 2017. "New Dutch pension contracts and lessons for other countries," Other publications TiSEM ed7f9e17-3fda-4db9-a48d-f, Tilburg University, School of Economics and Management.
    10. Antje Mahayni & Oliver Lubos & Sascha Offermann, 2021. "Minimum return rate guarantees under default risk: optimal design of quantile guarantees," Review of Managerial Science, Springer, vol. 15(7), pages 1821-1848, October.
    11. van Bilsen, Servaas & Linders, Daniël, 2019. "Affordable and adequate annuities with stable payouts: Fantasy or reality?," Insurance: Mathematics and Economics, Elsevier, vol. 86(C), pages 19-42.
    12. Ioannis Petrakis & Georgios A. Panos, 2025. "Pension Policy and Personal Finance: Defined-Contribution Plans and Retirement Strategies in the United Kingdom," Working Papers 2025_06, Business School - Economics, University of Glasgow.

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    Keywords

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    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions

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