Optimal Retirement Products under Subjective Mortality Beliefs

Abstract

Many empirical studies confirm that policyholder's subjective mortality beliefs deviate from the information given by publicly available mortality tables. In this study, we look at the effect of subjective mortality beliefs on the perceived attractiveness of retirement products, focusing on conventional annuities and tontines (where a pool of policyholders shares the longevity risk). Given actuarially fair pricing with no subjective mortality beliefs (that is, the insurer's and the policyholder's perceptions coincide), annuities yield higher lifetime utility than tontines (see also Milevsky and Salisbury (2015)). Staying in an actuarially fair pricing framework, we find that this result might be reversed if the policyholder's subjective survival probabilities for her peers are lower than the ones used by the insurance company. We prove that, assuming such subjective beliefs, there exists a critical tontine pool size from which on the tontine is always preferred over the annuity.

Keywords: Behavioral insurance, subjective mortality beliefs, optimal retirement product design, tontine, annuity

JEL Classification: G22, D81