Optimal Retirement Products under Subjective Mortality Beliefs

36 Pages Posted: 3 Dec 2018 Last revised: 20 Oct 2019

See all articles by An Chen

An Chen

University of Ulm

Peter Hieber

University of Ulm - Department of Mathematics and Economics; Catholic University of Louvain (UCL)

Manuel Rach

University of Ulm - Institute of Insurance Science

Date Written: October 8, 2019

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

Suggested Citation

Chen, An and Hieber, Peter and Rach, Manuel, Optimal Retirement Products under Subjective Mortality Beliefs (October 8, 2019). Available at SSRN: https://ssrn.com/abstract=3287699 or http://dx.doi.org/10.2139/ssrn.3287699

An Chen

University of Ulm ( email )

Helmholtzstrasse 20
Ulm, D-89081
Germany

HOME PAGE: http://www.uni-ulm.de/mawi/ivw/team

Peter Hieber

University of Ulm - Department of Mathematics and Economics ( email )

Helmholzstrasse
Ulm, D-89081
Germany

Catholic University of Louvain (UCL) ( email )

Place Montesquieu, 3
Louvain-la-Neuve, 1348
Belgium

Manuel Rach (Contact Author)

University of Ulm - Institute of Insurance Science ( email )

Ulm, 89081
Germany

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