Lifecycle Portfolio Choice with Systematic Longevity Risk and Variable Investment-Linked Deferred Annuities

Download or read book Lifecycle Portfolio Choice with Systematic Longevity Risk and Variable Investment-Linked Deferred Annuities written by Vasily Kartashov and published by . This book was released on 2011 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper assesses the impact of variable investment-linked deferred annuities (VILDAs) on lifecycle consumption, saving, and portfolio allocation patterns given stochastic and systematic mortality. Insurers have taken two approaches to manage systematic mortality risks, namely self-insurance and risk transfer to purchasers of the annuity products. We demonstrate that self-insurance leads to high loadings, so that households offered a choice would favor the risk transfer scheme. Reservation loadings on the actuarially fair VILDA price for non-participation are 0.5-8%; if insurers cannot hedge within this range, they will transfer systematic longevity risks to the annuitants. Our findings have implications for new payout products that may be attractive to older households seeking to protect against retirement shortfalls.