A Unified Framework for Mortality Immunization and Insurance Demand

39 Pages Posted: 8 Jun 2020 Last revised: 7 Apr 2021

See all articles by Hua Chen

Hua Chen

University of Hawaii at Manoa

Jin Gao

Hong Kong Lingnan University; Hong Kong Lingnan University

Wei Zhu

University of International Business and Economics (UIBE)

Date Written: March 2, 2021

Abstract

This paper explores an individual’s optimal insurance choice and an insurer’s optimal product mix consisting of whole life insurance and deferred annuity under the tâtonnement framework. On the demand side, the insured decides an optimal insurance choice by maximising lifetime expected utility. On the supply side, an insurer chooses an optimal product mix by minimising the Conditional Value-at-Risk (CVaR) of losses in its lines of business. By varying the loading factor for each insurance product, we match the demand and the supply of these products to clear the market. Our results show that market equilibriums occur when life insurance loading is relatively high and annuity loading is relatively low. This calls for attentions for insurance regulators and insurance companies to re-examine insurance/annuity underwriting and pricing. Our results also help explain the annuity puzzle and the life insurance puzzle in a neoclassic economic framework.

Keywords: Life-Cycle Model, Mortality Immunization, Tâtonnement Pricing

Suggested Citation

Chen, Hua and Gao, Jin and Gao, Jin and Zhu, Wei, A Unified Framework for Mortality Immunization and Insurance Demand (March 2, 2021). Available at SSRN: https://ssrn.com/abstract=3598746 or http://dx.doi.org/10.2139/ssrn.3598746

Hua Chen (Contact Author)

University of Hawaii at Manoa ( email )

2404 Maile Way, E-602e
Honolulu, HI 96822
United States
(808) 956-8063 (Phone)
(808) 956-9887 (Fax)

Jin Gao

Hong Kong Lingnan University ( email )

Department of Finance and Insurance
8 Castle Peak Road
Tuen Mun, NT NA
Hong Kong
+85226168153 (Phone)

HOME PAGE: http://www.ln.edu.hk

Hong Kong Lingnan University ( email )

Department of Finance and Insurance
8 Castle Peak Road
Tuen Mun, NT NA
Hong Kong
+85226168153 (Phone)

HOME PAGE: http://www.ln.edu.hk

Wei Zhu

University of International Business and Economics (UIBE) ( email )

10, Huixin Dongjie
Changyang District
Beijing, Beijing 100029
China

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