The Modern Tontine: An Innovative Instrument for Longevity Risk Management in an Aging Society

Weinert, Jan-Hendrik; Gründl, Helmut

doi:10.2139/ssrn.3088527

Cited by 15 publications

(9 citation statements)

References 45 publications

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“…Weinert (2017b) analyses the implications of providing tontine members with the option to cancel the contract and derives the fair surrender value. Weinert & Gründl (2016) study the suitability of tontines with their age-increasing payout structure as complements to traditional retirement products against the background of the aforementioned demographic challenges. That paper, however, only analyses the fundamental effects of tontinisation in a simplified framework without capital markets.…”

Section: Introductionmentioning

confidence: 99%

Optimal portfolio choice with tontines under systematic longevity risk

Gemmo

Rogalla

Weinert³

2020

Ann. actuar. sci.

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We derive optimal portfolio choice patterns in retirement (ages 66–105) for a constant relative risk aversion utility maximising investor facing risky capital market returns, stochastic mortality risk, and income-reducing health shocks. Beyond the usual stocks and bonds, the individual can invest his assets in tontines. Tontines are cost-efficient financial contracts providing age-increasing, but volatile cash flows, generated through the pooling of mortality without guarantees, which can help to match increasing financing needs at old ages. We find that a tontine invested in the risk-free asset dominates stock investments for older investors without a bequest motive. However, with a bequest motive, it is optimal to replace the tontine investment over time with traditional financial assets. Our results indicate that early in retirement, a tontine is only an attractive investment option, if the tontine funds are invested in a risky asset. In this case, they crowd out stocks and risk-free bonds in the optimal portfolios of younger investors. Over time, the average optimal portfolio weight of tontines decreases. Introducing systematic mortality risks noticeably reduces the peak allocation to tontines.

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Section: Introductionmentioning

confidence: 99%

Optimal portfolio choice with tontines under systematic longevity risk

Gemmo

Rogalla

Weinert³

2020

Ann. actuar. sci.

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“…Originally developed for speculative purposes, tontine annuities have recently been revised as a form of longevity risk management. See, for example, McKeever (2009), Baker & Siegelman (2010), Sabin (2010), Milevsky (2014), Milevsky & Salisbury (2015), Milevsky & Salisbury (2016), Weinert & Gründl (2016), and Chen et al (2019).…”

Section: Introductionmentioning

confidence: 99%

Linking annuity benefits to the longevity experience: alternative solutions

Olivieri

Pitacco

2020

Ann. actuar. sci.

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The uncertainty regarding financial returns and the life expectancy, joint to the reduced social security benefits, increasingly expose individuals to the risk of outliving their post-retirement assets. However, the demand for longevity guarantees remains low, due to high costs. The providers, on their side, may be reluctant to offer non-adjustable longevity guarantees, as the risk is long term and difficult to predict. It is therefore convenient to reconsider the design of longevity guarantees. In particular, a participating structure, providing a link to some longevity experience, could allow a sharing of losses, and possibly profits, resulting in a reduction of the cost of the retained guarantee. The literature review suggests a number of alternatives to define a longevity-linking arrangement, but the topic is not yet completely explored. It is useful, in particular, to have a common framework, under which the various solutions can be interpreted and compared, also with a view to the trade-off between the retained risk and the cost of the guarantee. Developing a general structure describing longevity-linked post-retirement benefits is the main purpose of this paper. Allowing for aggregate longevity risk, we then examine suitable solutions for insurance products.

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“…Naturally, the question arises whether the advantages of annuities and tontines can be combined to form a product which is cheaper than an annuity and shifts the longevity risk not completely, but only partially toward the policyholder. Possible ways of combining annuities and tontines are already examined in Weinert and Gründl (2017) and . Chen et al (2019) present a new retirement product called "tonuity" which is a tontine at early retirement ages, but switches to an annuity at a predetermined switching time.…”

Section: Introductionmentioning

confidence: 99%

“…Chen et al (2019) present a new retirement product called "tonuity" which is a tontine at early retirement ages, but switches to an annuity at a predetermined switching time. Weinert and Gründl (2017) focus on how the policyholder can optimally invest fractions of her wealth in tontines and annuities in a cumulative prospect theory framework, where the tontine design is taken from Sabin (2010). In this article, we compare various combinations of annuities and tontines in a classical expected utility framework to find the "best" product from the policyholder's viewpoint, where we focus on the tontine design from Milevsky and Salisbury (2015).…”

Section: Introductionmentioning

confidence: 99%

On the Optimal Combination of Annuities and Tontines

Chen¹,

Rach²,

Sehner³

2020

ASTIN Bull.

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Tontines, retirement products constructed in such a way that the longevity risk is shared in a pool of policyholders, have recently gained vast attention from researchers and practitioners. Typically, these products are cheaper than annuities, but do not provide stable payments to policyholders. This raises the question whether, from the policyholders' viewpoint, the advantages of annuities and tontines can be combined to form a retirement plan which is cheaper than an annuity, but provides a less volatile retirement income than a tontine. In this article, we analyze and compare three approaches of combining annuities and tontines in an expected utility framework: the previously introduced “tonuity”, a product very similar to the tonuity which we call “antine” and a portfolio consisting of an annuity and a tontine. We show that the payoffs of a tonuity and an antine can be replicated by a portfolio consisting of an annuity and a tontine. Consequently, policyholders achieve higher expected utility levels when choosing the portfolio over the novel retirement products tonuity and antine. Further, we derive conditions on the premium loadings of annuities and tontines indicating when the optimal portfolio is investing a positive amount in both annuity and tontine, and when the optimal portfolio turns out to be a pure annuity or a pure tontine.

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The Modern Tontine: An Innovative Instrument for Longevity Risk Management in an Aging Society

Cited by 15 publications

References 45 publications

Optimal portfolio choice with tontines under systematic longevity risk

Optimal portfolio choice with tontines under systematic longevity risk

Linking annuity benefits to the longevity experience: alternative solutions

On the Optimal Combination of Annuities and Tontines

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