Seminario académico “Decreasing Bequest Embedded Annuities: A Feasible Pension Product”

 

Titulo: Seminario académico ” Decreasing Bequest Embedded Annuities: A Feasible Pension Product”

Abstract: The Annuity Puzzle shows that most people are not voluntarily selecting annuities as a pension product, even though, in this case, longevity and investment risks are transferred to the insurance companies instead of being beared by retired workers. One of the main reasons for this could be the bequest motive that makes retiring workers prefer a Phased Withdrawal product where the property of savings is maintained, as well as the possibility of eventually leaving some (unknown) amount of money for their heirs. Beyond the cost of bearing the longevity and investment risks, the cost of bequest is not “explicit” for the workers at the moment of retirement, distorting the decision between Phased Withdrawal and Annuity as the optimal pension product. A way out of the “bequest issue” related to traditional annuities is the possibility of money-back guaranteed annuities increasingly sold in the US and representing about 60% of the annuity market in recent years. In a Cash-Refund Annuity, we should solve a recursivity problem since the price of the annuity depends on the expected bequest which also depends on the price of the annuity. Moreover, the guaranteed period is endogenous at the time of retirement. A retirement product with the benefits of traditional annuities (transferring investment and longevity risks to insurance companies), allowing for a bequest, should be simple enough to be understood by retiring workers. To simplify such a product, the bequest must be independent of the price of the annuity. This requires defining in advance the guaranteed period and then the bequest amount. Once the bequest is priced, the remaining premium is used to buy the annuity. Under this pricing method, the retiring worker knows from the very beginning the guaranteed period, the amount of the bequest depending on the year of death, as well as the amount of the annuity lifetime income. In addition, the cost of the bequest is explicit for the retiring worker in terms of how much lifetime income is giving up. From the insurer’s point of view, this Decreasing Bequest Annuity allows for lower Solvency Capital Requirements and Risk Margins because of the natural hedging between longevity and mortality risk for the bundled product. This reduction in Risk Margins, if translated into a lower loading factor by the insurer, should imply a better deal for annuitants given the higher Money’s Worth Ratio associated with the Decreasing Bequest Annuity.

 

Presenta: Marco Morales (UDP)