The Optimal Allocation of Longevity Risk with Perfect Insurance Markets

35 Pages Posted: 12 Feb 2018 Last revised: 22 Feb 2018

See all articles by Antoine Bommier

Antoine Bommier

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich

Hélène Schernberg

ETH Zurich

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

Bommier, Antoine and Schernberg, Hélène, The Optimal Allocation of Longevity Risk with Perfect Insurance Markets (February 12, 2018). Available at SSRN: https://ssrn.com/abstract=3121126 or http://dx.doi.org/10.2139/ssrn.3121126

Antoine Bommier (Contact Author)

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland

Hélène Schernberg

ETH Zurich ( email )

Zürichbergstrasse 18
8092 Zurich, CH-1015
Switzerland

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
121
Abstract Views
802
Rank
417,019
PlumX Metrics