COMMERCIAL AND INDUSTRIAL MATHEMATICS

April 21, 2024
THE FIELDS INSTITUTE FOR RESEARCH IN MATHEMATICAL SCIENCES

November 28, 2012

2012 Annual IFID Centre Conference
Conference Theme: "Alternative Annuity Designs"
8:55 a.m.-12:30 p.m.
Fields Institute,
222 College St., Toronto
Note: The conference is free of charge (compliments of the IFID Centre at the Fields Institute) but is currently over capacity. To request a spot on the wait list, please contact the office manager, Alexa Brand (abrand@ifid.ca).
The 12th annual conference organized by the IFID Centre will take place at the Fields Institute on the morning of Thursday, November 28th. The theme of this year’s conference will be ALTERNATIVE ANNUITY DESIGNS: How should we engineer the next generation of retirement income products so that they are appealing to retirees but also share risk equitably with insurance companies?

Speakers:

Jorge Miguel Bravo (University of Évora & Nova University of Lisbon)
Sharing longevity risk in life annuity contracts (slides)

Abstract: In this talk we develop a conceptual framework for the payout phase in which annuity providers and policyholders share longevity and investment risks in a flexible way. To be more precise, we develop a participating life annuity product in which systematic longevity risk, i.e., the risk associated with systematic deviations from mortality rates extracted from prospective life tables is shared between annuitants and annuity providers. This will address some of the main demand and supply constraints in annuity markets, namely the inexistence of appropriate life tables, the perception of unfair pricing, the consideration of bequest motives, adverse selection problems or the lack of financial instruments to hedge against longevity risk. Contrary to traditional Group self-annuitization (GSA) strategies, in which surviving policyholders bear both systematic and unsystematic longevity risk, we devise a contract in which, in exchange for premium, annuitants will bear part of longevity risk.

Catherine Donnelly (Heriot-Watt University, Edinburgh, U.K.)
The future is not guaranteed: lesser-known relatives of the life annuity (slides)

Abstract: Life annuities give a guaranteed income, and hence financial security, for life. Yet many people do not buy them, for reasons that may include their apparent high cost and irreversible nature. This means that relatively few people gain from one of the primary benefits of life annuities - the pooling of mortality risk. Is there another solution?
We examine a family of alternatives to the life annuity, called "pooled annuity funds". Surviving participants in the pooled annuity funds have a higher income than they would have managing their finances alone. The reason is due to the pooling of mortality risk. Unlike a life annuity contract, pooled annuity funds can allow participants to have complete investment freedom and they do not have to be irreversible.
A pooled annuity fund offers no financial guarantees: this has positive and negative implications for individuals. We discuss the advantages and disadvantages of pooled annuity funds, and analyze the number of people required to pool adequately the mortality risk.
The presentation is based on joint work with Montserrat Guillen of University of Barcelona, Spain, and Jens Perch Nielsen, Cass Business School, London, U.K.

Don Ezra (Principal, Don Ezra Consulting Services)
The Ideal Retirement Annuity: A Personal Perspective

Michael J. Sabin (Independent Consultant, Sunnyvale, CA)
Fair Tontine Annuity (slides)

Abstract: A tontine is an arrangement in which a group of members contribute money to a pool, and each time a member dies, his or her contribution is divided among surviving members. Tontines have existed since the 1600's but fell out of favor in modern times as insurer-provided annuities became available.
In this talk we revisit the tontine and show how to make it actuarially fair across a diverse group of members of varying ages and contribution amounts. This is accomplished by distributing a dying member's contribution in unequal amounts according to a plan that provides each member with a fair bet. The fairness property turns out to solve a handful of problems with the tontine, both theoretical and practical. The resulting fair tontine is a versatile block on which legitimate financial products can be built.
One such product is a fair tontine annuity (FTA), where the member makes a one-time contribution and receives payments on a fixed schedule (e.g., monthly) that last for his lifetime. Each payment is a random amount whose expected value is constant over the member's lifetime. The FTA offers a higher expected payout than an insurer-provided annuity because no profit is being extracted. It imposes no risk on the provider and thus can be offered by vendors other than insurers, such as mutual fund houses, retail brokers, etc.

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