Optimal Retirement Products under Subjective Mortality Beliefs

42 Pages Posted: 3 Dec 2018 Last revised: 17 Oct 2020

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: June 2, 2020

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 two extreme products, conventional annuities (where the insurance company takes the longevity risk) and tontines (where a pool of policyholders shares the longevity risk). If risk loadings and charges are neglected, a standard expected utility framework, without subjective mortality beliefs, leads to conclude that annuities are always preferred to tontines (Yaari (1965), Milevsky and Salisbury (2015)). In the same setting, we show that this result is easily reversed if an individual perceives her peer's life expectancies to be 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. This suggests that tontines might be perceived as much more attractive than suggested by standard expected utility theory without subjective mortality beliefs.

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 (June 2, 2020). Insurance: Mathematics and Economics, forthcoming, 2020, 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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