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Longevity Risk: To Bear or to Insure?

48 Pages Posted: 3 Mar 2017 Last revised: 29 Nov 2017

Ling-Ni Boon

Tilburg University

Marie Briere

Amundi Asset Management; Paris Dauphine University; Université Libre de Bruxelles

Bas J. M. Werker

Tilburg University - Center for Economic Research (CentER)

Date Written: November 2017

Abstract

We compare two contracts for managing systematic longevity risk in retirement: a collective arrangement that distributes the risk among participants, and a market-provided annuity contract. We evaluate the contracts’ appeal with respect to the retiree’s welfare, and the viability of the market solution through the financial reward to the annuity provider’s equityholders. The collective agreement yields marginally higher individual welfare than an annuity contract priced at its best estimate. Under realistic capital provision hypotheses, the annuity provider is incapable of adequately compensating its equityholders for bearing longevity risk. Individuals find it more attractive to bear longevity risk under a collective arrangement than to insure it with a life insurers’annuity contract subject to insolvency risk (albeit small).

Keywords: longevity risk, group self-annuitization (GSA), insurance, variable annuity

JEL Classification: D14, E21, G22, G23

Suggested Citation

Boon, Ling-Ni and Briere, Marie and Werker, Bas J. M., Longevity Risk: To Bear or to Insure? (November 2017). Available at SSRN: https://ssrn.com/abstract=2926902 or http://dx.doi.org/10.2139/ssrn.2926902

Ling-Ni Boon

Tilburg University ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Marie Briere (Contact Author)

Amundi Asset Management ( email )

90 Boulevard Pasteur
Paris, 75015
France

Paris Dauphine University ( email )

place du Maréchal de Lattre de Tassigny
Paris, 75016
France

Université Libre de Bruxelles ( email )

Brussels
Belgium

Bas J.M. Werker

Tilburg University - Center for Economic Research (CentER) ( email )

Econometrics and Finance Group
5000 LE Tilburg
Netherlands

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