Linking Annuity Benefits to the Longevity Experience: A General Framework

29 Pages Posted: 11 Feb 2019

See all articles by Annamaria Olivieri

Annamaria Olivieri

University of Parma - Dipartimento di Economia

Ermanno Pitacco

University of Trieste - Dipartimento di Scienze Economiche, Aziendali, Matematiche e Statistiche B. de Finetti

Date Written: January 31, 2019

Abstract

The uncertainty regarding financial returns and the life expectancy, joint to the reduced social security benefits, increasingly expose individuals to the risk of outliving their post-retirement assets. However, the demand for longevity guarantees remains low, due to high costs. The providers, on their side, may be reluctant to offer non-adjustable longevity guarantees, as the risk is long-term and difficult to predict. It is therefore convenient, from both the point of view of the individual and the provider, to reconsider the design of longevity guarantees. In particular, a participating structure, providing a link to some longevity experience, could allow a sharing of losses, and possibly profits, resulting in a reduction of the cost of the retained guarantee. The literature review suggests a number of alternatives to define a longevity linking arrangement, but the topic is not yet completely explored. It is useful, in particular, to have a common framework, under which the various solutions can be interpreted and compared, also with a view to the trade-off between the retained risk and the cost of the guarantee. Developing a general framework describing longevity-linked post-retirement benefits is the main purpose of this paper. Allowing for aggregate longevity risk, we then examine suitable solutions for insurance products.

Keywords: Longevity-Linked Annuities, Longevity Risk Participating Annuities, Aggregate Longevity Risk, Longevity Guarantee

JEL Classification: G22

Suggested Citation

Olivieri, Annamaria and Pitacco, Ermanno, Linking Annuity Benefits to the Longevity Experience: A General Framework (January 31, 2019). Available at SSRN: https://ssrn.com/abstract=3326672 or http://dx.doi.org/10.2139/ssrn.3326672

Annamaria Olivieri (Contact Author)

University of Parma - Dipartimento di Economia ( email )

Via Kennedy 6
Parma, Parma 43100
Italy

Ermanno Pitacco

University of Trieste - Dipartimento di Scienze Economiche, Aziendali, Matematiche e Statistiche B. de Finetti

Piazzale Europa 1
Trieste, Trieste 34100
Italy

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