The Optimal Allocation of Longevity Risk with Perfect Insurance Markets
35 Pages Posted: 12 Feb 2018 Last revised: 22 Feb 2018
Date Written: February 12, 2018
Abstract
This paper discusses the allocation of aggregate longevity risk in the case of perfect insurance markets. We show that the optimal allocation transfers some risk to the pensioners, even if pension providers have access to a perfect insurance market. Individuals prefer contributions and benefits to depend on the evolution of aggregate mortality rates rather than being fixed. Indeed, this flexibility offers an interesting diversification strategy where the prospect of a shorter life (e.g. the emergence of new diseases) implies higher consumption levels and conversely, the prospect of a longer life (e.g. thanks to medical progress) implies lower consumption levels. The underlying mechanism only emerges when individuals are temporally risk averse. We illustrate it with risk-sensitive preferences.
Keywords: pensions, longevity risk, risk-sharing, risk-sensitive preferences
JEL Classification: D91, G28, H55, J32
Suggested Citation: Suggested Citation