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Longevity Risk: To Bear or to Insure?

We compare two longevity risk management contracts in retirement: a collective arrangement that distributes the risk among participants, and a market-provided annuity contract. We evaluate the contracts’ appeal with respect to the retiree’s welfare, and the viability of the market solution through the financial reward to the annuity provider’s equity holders. The collective agreement yields marginally higher individual welfare than an annuity contract priced at its best estimate, and the annuity provider is incapable of adequately compensating its equity holders for bearing longevity risk. Therefore, market-provided annuity contracts would not co-exist with collective schemes.

Amundi Working Paper - March 2017

Marie BRIERE, Head of Investor Research Center at Amundi
Ling-Ni BOON, Investor Research Center
Bas J.M WERKER, Professor of Finance and Econometrics at Tilburg University

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Longevity Risk: To Bear or to Insure?
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