Longevity Risk: To Bear or to Insure?
48 Pages Posted: 3 Mar 2017 Last revised: 29 Nov 2017
Date Written: November 2017
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: Suggested Citation