Explaining Low Annuity Demand: An Optimal Portfolio Application to Japan

31 Pages Posted: 28 Jan 2008

See all articles by Sachi Purcal

Sachi Purcal

Macquarie University - Department of Actuarial Studies; Financial Research Network (FIRN); Macquarie University, Macquarie Business School

John Piggott

University of New South Wales (UNSW) - Australian School of Business, School of Economics

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Abstract

Using an optimising financial planning model in the tradition of Merton (1969, 1971), and Richard (1975) we explore how individuals should determine their life insurance and annuity choices, given uncertainty about investment returns and mortality. Both consumption and bequests appear as arguments in the individual's preference function. The model explicitly recognizes the existence of social security in retirement, and of loadings on insurance premiums, due to administration costs in the life insurance and annuities markets. The model sheds light on the reasons for the thinness of voluntary life annuity markets worldwide. The relative importance of pre-existing annuitisation through social security, the role of bequests, and premium loadings are quantitatively assessed within a single optimizing framework. Results are presented for a model specification calibrated to Japan.

Keywords: Annuities, Japan, life insurance, retirement, pensions

JEL Classification: C61, D14, D91, G11, G22, H55, J26

Suggested Citation

Purcal, Sachi and Piggott, John, Explaining Low Annuity Demand: An Optimal Portfolio Application to Japan. Journal of Risk and Insurance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1088030

Sachi Purcal (Contact Author)

Macquarie University - Department of Actuarial Studies ( email )

North Ryde
Sydney, New South Wales 2109
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

John Piggott

University of New South Wales (UNSW) - Australian School of Business, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

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