Individual Annuity Demand under Aggregate Mortality Risk

38 Pages Posted: 3 Aug 2006 Last revised: 26 Aug 2008

Thomas Post

Maastricht University - School of Business and Economics - Department of Finance; Netspar

Roman Schulze

Humboldt University of Berlin

Multiple version iconThere are 2 versions of this paper

Date Written: August 25, 2008

Abstract

Aggregate mortality risk - the risk that the mortality trend in a population changes in a nondeterministic way - and its implications for corporate decisions has recently been the subject of lively scientific discussion. We show that aggregate mortality risk is also a key determinant for individual annuitization decisions. Aggregate mortality risk appears to be a risk very difficult to transfer for individuals. Whether its existence leads to a higher or lower annuity demand depends on objective factors (e.g., insurers' vulnerability to aggregate mortality changes). Subjective factors (i.e., individuals' preferences) determine only the intensity of the annuity demand reaction to aggregate mortality risk. Our results are of significant importance not only for financial planning approaches of individual annuity buyers, but also for strategic decisions in insurance companies and for solvency regulators. Furthermore, consideration of aggregate mortality risk may both alleviate, but also intensify, the annuity puzzle.

Keywords: aggregate mortality risk, annuitization, retirement decisions, annuity puzzle, intertemporal utility maximization

JEL Classification: D14, D81, D91, G11, G22, J11, J26

Suggested Citation

Post, Thomas and Schulze, Roman, Individual Annuity Demand under Aggregate Mortality Risk (August 25, 2008). Available at SSRN: https://ssrn.com/abstract=920839 or http://dx.doi.org/10.2139/ssrn.920839

Thomas Post (Contact Author)

Maastricht University - School of Business and Economics - Department of Finance ( email )

Tongersestraat 53
Maastricht, 6200 MD
Netherlands
+31 43 38 83899 (Phone)
+31 43 38 84875 (Fax)

HOME PAGE: http://www.thomas-post.com

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

HOME PAGE: http://www.netspar.nl

Roman Schulze

Humboldt University of Berlin ( email )

Unter den Linden 6
Berlin, Berlin 10099
Germany

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