Faculty of Actuarial Science and Insurance Seminar with Colin Ramsay, University of Nebraska-Lincoln.
Registration is now closed (this event already took place).
Doubly Enhanced Annuities
A 2017 Willis Towers Watson study of 1 global pension assets covering 22 major pension markets shows a staggering total of US$36,435 billion in pension assets with the U.S. and the U.K. accounting for close to 70% of these assets. While this total demonstrates a high degree of participation in the accumulation of assets intended for retirement, the U.S. and U.K. markets for voluntary individual immediate life annuities are small relative to other financial investment outlets competing for retirement savings. The relatively small size of voluntary immediate life annuity markets is called the “annuity puzzle” because their size seemingly contradicts Yaari’s (1965) assertion that, under certain conditions, utility maximizing retirees should annuitize all of their wealth upon retirement. The main explanations for the annuity puzzle adverse selection (i.e., the longevity risk), bequestmotives, and fear of health shocks. Because insurers fear annuitants livingwell beyond their life expectancy, voluntary immediate life annuities are priced in a manner that make them unattractive to the general retiree population. One annuity product that is attractive the general retiree population is a so-called enhanced (substandard or impaired life) annuity that partly solves the problem of adverse selection.
Enhanced annuities are medically underwritten to provide greater annual benefits to those with shorter than average life expectancy. Unfortunately, enhanced annuities do not tackle the problem of long term care due to medical shocks during the retirement years. We will develop a hybrid annuity called a doubly enhanced annuity that protects against adverse selection, provides a long termcare benefit, and satisfies a bequestmotive through a death benefit.
Keywords and phrases: annuity puzzle, long termcare, adverse selection, bequestmotives, doubly enhanced annuity.
Cass Business School, 106 Bunhill Row
106Bunhill Row, London EC1Y 8TZ, Great Britain (UK)
Contact the organizers