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Explaining Low Annuity Demand: An Optimal Portfolio Application to Japan
Author(s) -
Purcal Sachi,
Piggott John
Publication year - 2008
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/j.1539-6975.2008.00269.x
Subject(s) - annuity , economics , life annuity , social security , portfolio , actuarial science , life insurance , longevity risk , consumption (sociology) , investment (military) , microeconomics , financial economics , pension , finance , social science , sociology , market economy , politics , political science , law
Using an optimizing financial planning model in the tradition of Merton and Richard we explore how individuals should determine their life insurance and annuity choices, given uncertainty about investment returns and mortality. Both consumption and bequests appear as arguments in the individual's preference function. The model explicitly recognizes the existence of social security in retirement, and of loadings on insurance premiums, due to administration costs in the life insurance and annuities markets. The model sheds light on the reasons for the thinness of voluntary life annuity markets worldwide. The relative importance of pre‐existing annuitization through social security, the role of bequests, and premium loadings are quantitatively assessed within a single optimizing framework. Results are presented for a model specification calibrated to Japan.