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Article
Publication date: 15 June 2021

Tomoki Kitamura and Kunio Nakashima

Deferred annuities, which offer longevity insurance with relatively low premiums, are a potential payout option in defined contribution (DC) pension plans in Japan. This…

Abstract

Purpose

Deferred annuities, which offer longevity insurance with relatively low premiums, are a potential payout option in defined contribution (DC) pension plans in Japan. This study aims to measure individual preferences for these annuities.

Design/methodology/approach

This study conducts stated choice experiments using an original internet survey. This methodology provides a decision-making scenario similar to that faced by individuals when making real retirement saving decisions. Subjective valuations of deferred, immediate and term annuities are compared.

Findings

This study finds that male individuals have an insignificant preference for deferred annuities – the benefits of which begin at an advanced age. On average, deferred annuities are considered a gamble, betting against life and individuals who are married and have higher financial assets tend to value them less.

Originality/value

While previous studies, based on theory and simulations, have found that deferred annuities should be included in individual retirement assets, this study examines annuity preferences from the demand side (i.e. DC plan participants) –an approach that has not been addressed in the literature.

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Article
Publication date: 2 July 2020

Canicio Dzingirai and Nixon S. Chekenya

The life insurance industry has been exposed to high levels of longevity risk born from the mismatch between realized mortality trends and anticipated forecast. Annuity

Abstract

Purpose

The life insurance industry has been exposed to high levels of longevity risk born from the mismatch between realized mortality trends and anticipated forecast. Annuity providers are exposed to extended periods of annuity payments. There are no immediate instruments in the market to counter the risk directly. This paper aims to develop appropriate instruments for hedging longevity risk and providing an insight on how existing products can be tailor-made to effectively immunize portfolios consisting of life insurance using a cointegration vector error correction model with regime-switching (RS-VECM), which enables both short-term fluctuations, through the autoregressive structure [AR(1)] and long-run equilibria using a cointegration relationship. The authors also develop synthetic products that can be used to effectively hedge longevity risk faced by life insurance and annuity providers who actively hold portfolios of life insurance products. Models are derived using South African data. The authors also derive closed-form expressions for hedge ratios associated with synthetic products written on life insurance contracts as this will provide a natural way of immunizing the associated portfolios. The authors further show how to address the current liquidity challenges in the longevity market by devising longevity swaps and develop pricing and hedging algorithms for longevity-linked securities. The use of a cointergrating relationship improves the model fitting process, as all the VECMs and RS-VECMs yield greater criteria values than their vector autoregressive model (VAR) and regime-switching vector autoregressive model (RS-VAR) counterpart’s, even though there are accruing parameters involved.

Design/methodology/approach

The market model adopted from Ngai and Sherris (2011) is a cointegration RS-VECM for this enables both short-term fluctuations, through the AR(1) and long-run equilibria using a cointegration relationship (Johansen, 1988, 1995a, 1995b), with a heteroskedasticity through the use of regime-switching. The RS-VECM is seen to have the best fit for Australian data under various model selection criteria by Sherris and Zhang (2009). Harris (1997) (Sajjad et al., 2008) also fits a regime-switching VAR model using Australian (UK and US) data to four key macroeconomic variables (market stock indices), showing that regime-switching is a significant improvement over autoregressive conditional heteroscedasticity (ARCH) and generalised autoregressive conditional heteroscedasticity (GARCH) processes in the account for volatility, evidence similar to that of Sherris and Zhang (2009) in the case of Exponential Regressive Conditional Heteroscedasticity (ERCH). Ngai and Sherris (2011) and Sherris and Zhang (2009) also fit a VAR model to Australian data with simultaneous regime-switching across many economic and financial series.

Findings

The authors develop a longevity swap using nighttime data instead of usual income measures as it yields statistically accurate results. The authors also develop longevity derivatives and annuities including variable annuities with guaranteed lifetime withdrawal benefit (GLWB) and inflation-indexed annuities. Improved market and mortality models are developed and estimated using South African data to model the underlying risks. Macroeconomic variables dependence is modeled using a cointegrating VECM as used in Ngai and Sherris (2011), which enables both short-run dependence and long-run equilibrium. Longevity swaps provide protection against longevity risk and benefit the most from hedging longevity risk. Longevity bonds are also effective as a hedging instrument in life annuities. The cost of hedging, as reflected in the price of longevity risk, has a statistically significant effect on the effectiveness of hedging options.

Research limitations/implications

This study relied on secondary data partly reported by independent institutions and the government, which may be biased because of smoothening, interpolation or extrapolation processes.

Practical implications

An examination of South Africa’s mortality based on industry experience in comparison to population mortality would demand confirmation of the analysis in this paper based on Belgian data as well as other less developed economies. This study shows that to provide inflation-indexed life annuities, there is a need for an active market for hedging inflation in South Africa. This would demand the South African Government through the help of Actuarial Society of South Africa (ASSA) to issue inflation-indexed securities which will help annuities and insurance providers immunize their portfolios from longevity risk.

Social implications

In South Africa, there is an infant market for inflation hedging and no market for longevity swaps. The effect of not being able to hedge inflation is guaranteed, and longevity swaps in annuity products is revealed to be useful and significant, particularly using developing or emerging economies as a laboratory. This study has shown that government issuance or allowing issuance, of longevity swaps, can enable insurers to manage longevity risk. If the South African Government, through ASSA, is to develop a projected mortality reference index for South Africa, this would allow the development of mortality-linked securities and longevity swaps which ultimately maximize the social welfare of life assurance policy holders.

Originality/value

The paper proposes longevity swaps and static hedging because they are simple, less costly and practical with feasible applications to the South African market, an economy of over 50 million people. As the market for MLS develops further, dynamic hedging should become possible.

Details

The Journal of Risk Finance, vol. 21 no. 3
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 27 June 2019

Anran Chen, Steven Haberman and Stephen Thomas

Although it has been proved theoretically that annuities can provide optimal consumption during one’s retirement period, retirees’ reluctance to purchase annuities is a…

Abstract

Purpose

Although it has been proved theoretically that annuities can provide optimal consumption during one’s retirement period, retirees’ reluctance to purchase annuities is a long-standing puzzle. The purpose of this paper is to use behavioral model to analyze the low demand for immediate annuities.

Design/methodology/approach

The authors employ cumulative prospect theory (CPT), which contains both loss aversion and probability transformations, to analyze the annuity puzzle.

Findings

The authors show that CPT can explain the unattractiveness of immediate annuities. It also shows that retirees would be willing to buy a long-term deferred annuity at retirement. By considering each component from CPT in turn, the loss aversion is found to be the major reason that stops people from buying an annuity while the survival rate transformation is an important factor affecting the decision of when to receive annuity incomes.

Originality/value

This paper identifies CPT as one of the reasons for the low demand of immediate annuities. It further suggests that long-term deferred annuities could overcome behavioral obstacles and become popular among retirees.

Details

Review of Behavioral Finance, vol. 11 no. 3
Type: Research Article
ISSN: 1940-5979

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Article
Publication date: 15 May 2007

Robert Hudson

In the UK, there is a strong government commitment to the compulsory use of annuities to manage the “decumulation” of assets in defined contribution pension schemes…

Abstract

Purpose

In the UK, there is a strong government commitment to the compulsory use of annuities to manage the “decumulation” of assets in defined contribution pension schemes. Almost all annuity rates are determined by reference to the gender of the individual involved. This has the implication that females receive a lower pension for a given size of pension fund. It is arguable that this situation represents a clear case of sex discrimination and moral, legal‐ and policy‐based arguments can be made for and against this view. The purpose of this paper is to review these arguments in the light of emerging evidence about longevity.

Design/methodology/approach

The paper outlines the nature of the UK annuity market and the associated methods of annuity pricing, details the difficulties of predicting longevity and discusses the economic implications of a move to unisex annuity rates.

Findings

A number of recent trends are weakening the financial and statistical arguments against introducing unisex annuity rates. The life expectancy of males and females is converging, the use of annuity pricing factors other than gender is increasingly common and it has become clear that there is great uncertainty in mortality projections.

Practical implications

Statistical and financial arguments that gender should be a primary factor for costing annuities should be accorded less weight than in the past.

Originality/value

The paper offers an evaluation of the merits of unisex annuity rates in the light of recent evidence about longevity.

Details

Journal of Financial Regulation and Compliance, vol. 15 no. 2
Type: Research Article
ISSN: 1358-1988

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Article
Publication date: 1 January 2003

David Brant and Royce Griffin

If complaints about an agent’s sale of “ABC” mutual fund are handled by the state securities commissioner… Why should complaints about the same agent’s sale of a variable…

Abstract

If complaints about an agent’s sale of “ABC” mutual fund are handled by the state securities commissioner… Why should complaints about the same agent’s sale of a variable annuity invested in “ABC” mutual fund be handled exclusively by the state insurance commissioner? Are state laws enacted 35 years ago still relevant today when most agents who sell variable annuities are also licensed to sell mutual funds?

Details

Journal of Investment Compliance, vol. 3 no. 4
Type: Research Article
ISSN: 1528-5812

Keywords

Content available
Article
Publication date: 10 July 2017

Younes Soualhi

This paper aims to explore the challenges facing the development of a takāful retirement annuity plan in Malaysia. It also aims at exploring a new platform to re-launch…

Abstract

Purpose

This paper aims to explore the challenges facing the development of a takāful retirement annuity plan in Malaysia. It also aims at exploring a new platform to re-launch the same product after being withdrawn from the Malaysian annuity market a few years ago.

Design/methodology/approach

The research adopts a qualitative approach to address the possible challenges hindering the development of a takāful retirement annuity plan in Malaysia. The research will not discuss the Sharīʿah issues deemed settled in previous researches but will only focus on technical challenges related to the instruments of investment and prudential measures.

Findings

The research found that various challenges face the development of a takāful annuity plan in Malaysia. Some of those challenges are the downsizing of the ṣukūk market, the shortage of long-term ṣukūk, longevity risk and risk-based capitalization. The research found that there is a need for a diversified portfolio of securities instead of solely using ṣukūk as an investment instrument in this product.

Originality/value

Re-launching the takāful annuity plan in Malaysia requires the identification of actual challenges facing the development of such a product. The product purported to be re-launched would benefit a large segment of retirees who do not have enough savings during the retirement age. The introduction of such a product will also expand the takāful market in annuities, which remains untapped.

Details

ISRA International Journal of Islamic Finance, vol. 9 no. 1
Type: Research Article
ISSN: 0128-1976

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Article
Publication date: 18 August 2014

Jonas Lorson and Joël Wagner

The purpose of this paper is to develop a model to hedge annuity portfolios against increases in life expectancy. Across the globe, and in the industrial nations in…

Abstract

Purpose

The purpose of this paper is to develop a model to hedge annuity portfolios against increases in life expectancy. Across the globe, and in the industrial nations in particular, people have seen an unprecedented increase in their life expectancy over the past decades. The benefits of this apply to the individual, but the dangers apply to annuity providers. Insurance companies often possess no effective tools to address the longevity risk inherent in their annuity portfolio. Securitization can serve as a substitute for classic reinsurance, as it also transfers risk to third parties.

Design/methodology/approach

This paper extends on methods insurer's can use to hedge their annuity portfolio against longevity risk with the help of annuity securitization. Future mortality rates with the Lee-Carter-model and use the Wang-transformation to incorporate insurance risk are forecasted. Based on the percentile tranching method, where individual tranches are aligned to Standard & Poor's ratings, we price an inverse survivor bond. This bond offers fix coupon payments to investors, while the principal payments are at risk and depend on the survival rate within the underlying portfolio.

Findings

The contribution to the academic literature is threefold. On the theoretical side, building on the work of Kim and Choi (2011), we adapt their pricing model to the current market situation. Putting the principal at risk instead of the coupon payments, the insurer is supplied with sufficient capital to cover additional costs due to longevity. On the empirical side, the method for the German market is specified. Inserting specific country data into the model, price sensitivities of the presented securitization model are analyzed. Finally, in a case study, the procedure to the annuity portfolio of a large German life insurer is applied and the price of hedging longevity risk is calculated.

Practical implications

To illustrate the implication of this bond structure, several sensitivity tests were conducted before applying the pricing model to the retail sample annuity portfolio from a leading German life insurer. The securitization structure was applied to calculate the securitization prices for a sample portfolio from a large life insurance company.

Social implications

The findings contribute to the current discussion about how insurers can face longevity risk within their annuity portfolios. The fact that the rating structure has such a severe impact on the overall hedging costs for the insurer implies that companies that are willing to undergo an annuity securitization should consider their deal structure very carefully. In addition, we have pointed out that in imperfect markets, the retention of the equity tranche by the originator might be advantageous. Nevertheless, one has to bear in mind that by this behavior, the insurer is able to reduce the overall default risk in his balance sheet by securitizing a life insurance portfolio; however, the fraction of first loss pieces from defaults increases more than proportionally. The insurer has to take care to not be left with large, unwanted remaining risk positions in his books.

Originality/value

In this paper, we extend on methods insurer's can use to hedge their annuity portfolio against longevity risk with the help of annuity securitization. To do so, we take the perspective of the issuing insurance company and calculate the costs of hedging in a four-step process. On the theoretical side, building on the work of Kim and Choi (2011), we adapt their pricing model to the current market situation. On the empirical side, we specify the method for the German market. Inserting specific country data into the model, price sensitivities of the presented securitization model are analyzed.

Details

The Journal of Risk Finance, vol. 15 no. 4
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 22 February 2021

Samhita Mangu, Thillai Rajan Annamalai and Akash Deep

The use of public–private partnership (PPP) approaches for developing infrastructure has been well recognized. The allocation of risk between public authority and private…

Abstract

Purpose

The use of public–private partnership (PPP) approaches for developing infrastructure has been well recognized. The allocation of risk between public authority and private sector differs among the different types of PPP projects. The objective of the paper is to analyze the factors that influence the type of PPP and the performance of different types of PPP contracts.

Design/methodology/approach

A unique data set of 202 national highway PPP projects from India, comprising 154 toll and 48 annuity projects formed the basis of the study.

Findings

There are significant differences between toll and annuity PPP projects. The former are longer, are implemented in better developed states but are also characterized by higher cost over-runs. The latter are characterized by higher debt–equity ratio.

Practical implications

Mitigating revenue risk can significantly enhance the debt capacity of the projects, thereby reducing the overall cost of capital. To make toll roads attractive for bidders, they have to be developed as longer stretches. Toll projects that are immediately ready for development at the time of award would reduce cost overruns of toll projects and sustain the interest of private developers.

Originality/value

Comparison of toll and annuity PPP road projects has never been done previously. The unique data set used in this study highlights the differences in characterization and performance for both the project types. The study provides evidence support to “intuition” and enables policymakers to choose the right form of PPP to realize their objectives.

Details

Built Environment Project and Asset Management, vol. 11 no. 1
Type: Research Article
ISSN: 2044-124X

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Book part
Publication date: 14 July 2006

Jamie Morgan

The purpose of this paper is to explain how the current “crisis” in the UK pension system arose. I argue that it is a result of a combination of changes in government…

Abstract

The purpose of this paper is to explain how the current “crisis” in the UK pension system arose. I argue that it is a result of a combination of changes in government policy and basic instabilities always inherent in the financial system. Policy changes increased the vulnerability of the pension system to those instabilities. The background to these changes and also the frame of reference in terms of which the “crisis” itself is now phrased is broadly neoliberal. Its theoretical roots are in ideas of the efficiency of free markets. Its policy roots are expressed in a series of similar neoliberal policy tendencies in other capitalist states. I further argue that neoliberal solutions to the pension crisis simply offer more of the very matters that created the problems in the first place. Moreover, the very terms of debate, based in markets, financialisation of saving and individualisation of risk, disguise a more basic debate about providing a living retirement income for all. This is a debate that New Labour is simply not prepared to constructively engage with in any concrete fashion.

Details

The Hidden History of 9-11-2001
Type: Book
ISBN: 978-1-84950-408-9

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Article
Publication date: 2 December 2019

Michele L. Schaff and Jeffery E. Schaff

Discusses the significance of the Illinois Supreme Court ruling in Van Dyke v. White, which clarified that annuities are not securities in the state of Illinois, with a…

Abstract

Purpose

Discusses the significance of the Illinois Supreme Court ruling in Van Dyke v. White, which clarified that annuities are not securities in the state of Illinois, with a particular focus on the ramifications to insurance, brokerage and investment advisory standards of care as well as causes of action for breaches thereof.

Design/methodology/approach

Describes the Court’s ruling as it relates to the industry going forward. Does not discuss the specifics of the plaintiff’s case or history.

Findings

The statutory language of Illinois’ securities laws specifically excludes annuities from the definition of securities. For this reason, the Illinois Department of Insurance has sole authority over regulating annuities, giving the Illinois Department of Securities no authority, except to the extent there is an investment advisor breach pursuant to §12(J) of the Illinois Securities Law of 1953. The industry has yet to react or adjust to the Court’s ruling, so there may be a future wave of reactions.

Originality/value

Assists the reader in understanding the unique regulatory environment of annuities in Illinois, the relevant standards of care related to annuity advice and transactions, and remedies for grievances after the Illinois Supreme Court ruling in Van Dyke v. White.

Details

Journal of Investment Compliance, vol. 20 no. 4
Type: Research Article
ISSN: 1528-5812

Keywords

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