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There is an annuity puzzle in that despite the welfare gains to individuals and society from consumers purchasing annuities, the actual allocation to these instruments by individuals is very low. Many explanations have been provided including adverse selection, complexity and inflexibility of the annuity contract, bequest motive etc. Insurance companies have tried to address these issues by changing their products, but take up has still been low. Some have argued that governments should create and issue longevity bonds that attempt to hedge overall economy-wide mortality risk to improve insurance companies' ability to hedge their annuity offering, thereby lowering costs. But these longevity bonds have some challenges and while an “improving social-welfare” case can be made for why governments should issue such bonds, these proponents have not shown how governments have a natural hedge. Instead, we suggest governments should create Longevity-Indexed Variable Expiration (LIVE) bonds. These bonds, targeted to individuals (and institutions) would pay income-only, and start paying only after the average life-expectancy of the economy (having addressed retirement income through life expectancy with a complementary BFFS/SeLFIES bond). Each bond will be cohort specific and based on tax collections of that cohort. In this fashion, the government is fully hedged (because the bond will be a form of a collateralized debt obligation), and hence a natural issuer, with low credit risk. Since BFFS/SeLFIES cover the life-expectancy of those living less than the average, only those individuals who live beyond the average (usually richer portions of the population) and with limited resources need purchase LIVE bonds. The paper also briefly discusses the portfolio strategies of those living beyond average life expectancy (which raises one challenge with this bond) and also how governments can ensure that they have sufficient funds to bear this risk. It concludes with the challenges to this approach as there are only three levers in addressing this issue through a bond (coupon payments, bonds outstanding and maturity) and allowing maturity to be flexible requires the first two to decline over time and hence in LIVE we focus on just the coupon declining.
Uncertainty about length of life, longevity risk, is a growing financial problem for pension funds and annuity providers. They would like to transfer longevity risk away to institutions better placed to deal with it. Unfortunately, there is a lack of financial instruments to hedge against this longevity risk, thereby complicating risk management by pension funds and hindering the expansion of the annuity market. Consequently, this paper examines the role of government in promoting a private market solution for longevity hedging financial products. Governments could improve the market for annuities by issuing longevity indexed bonds and by producing a longevity index. The paper argues though that this public policy role is hampered by the fact that governments are themselves are already exposed to significant longevity risk. However, governments could take other steps such as producing a longevity index.
“Places of risk” and “sites of modernity” refer not merely to physical locations, but also objects and institutions that stand at the center of contemporary debates on security and risk. These are social and political domains where energy and infrastructure are produced, where domestic security is pursued and maintained, and where citizens encounter the state in its punitive or monitory roles. Taking a wide view of the period from the 1970s to today, this volume brings together innovative, interdisciplinary case studies of sites of modernity that promise to provide security and safety, yet at the same time are deemed responsible for creating new risks. With a particular contemporary interest in the technocratic changes of security and risk control the contributors to Sites of Modernity — Places of Risk position the 1970s as a turning point in the path from industrial to post-industrial modernity.
This publication helps policy makers to better understand annuity products and the guarantees they provide in order to optimise the role that these products can play in financing retirement. Product design is a crucial factor in the potential role of annuity products within the pension system, along with the cost and demand for these products, and the resulting risks that are borne by the annuity providers. Increasingly complex products, however, pose additional challenges concerning consumer protection. Consumers need to be aware of their options and have access to unbiased and comprehensible advice and information about these products.
The field of financial mathematics has developed tremendously over the past thirty years, and the underlying models that have taken shape in interest rate markets and bond markets, being much richer in structure than equity-derivative models, are particularly fascinating and complex. This book introduces the tools required for the arbitrage-free modelling of the dynamics of these markets. Andrew Cairns addresses not only seminal works but also modern developments. Refreshingly broad in scope, covering numerical methods, credit risk, and descriptive models, and with an approachable sequence of opening chapters, Interest Rate Models will make readers--be they graduate students, academics, or practitioners--confident enough to develop their own interest rate models or to price nonstandard derivatives using existing models. The mathematical chapters begin with the simple binomial model that introduces many core ideas. But the main chapters work their way systematically through all of the main developments in continuous-time interest rate modelling. The book describes fully the broad range of approaches to interest rate modelling: short-rate models, no-arbitrage models, the Heath-Jarrow-Morton framework, multifactor models, forward measures, positive-interest models, and market models. Later chapters cover some related topics, including numerical methods, credit risk, and model calibration. Significantly, the book develops the martingale approach to bond pricing in detail, concentrating on risk-neutral pricing, before later exploring recent advances in interest rate modelling where different pricing measures are important.
The April 2012 Global Financial Stability Report assesses changes in risks to financial stability over the past six months, focusing on sovereign vulnerabilities, risks stemming from private sector deleveraging, and assessing the continued resilience of emerging markets. The report probes the implications of recent reforms in the financial system for market perception of safe assets, and investigates the growing public and private costs of increased longevity risk from aging populations.
Health Insurance aims at filling a gap in actuarial literature, attempting to solve the frequent misunderstanding in regards to both the purpose and the contents of health insurance products (and ‘protection products’, more generally) on the one hand, and the relevant actuarial structures on the other. In order to cover the basic principles regarding health insurance techniques, the first few chapters in this book are mainly devoted to the need for health insurance and a description of insurance products in this area (sickness insurance, accident insurance, critical illness covers, income protection, long-term care insurance, health-related benefits as riders to life insurance policies). An introduction to general actuarial and risk-management issues follows. Basic actuarial models are presented for sickness insurance and income protection (i.e. disability annuities). Several numerical examples help the reader understand the main features of pricing and reserving in the health insurance area. A short introduction to actuarial models for long-term care insurance products is also provided. Advanced undergraduate and graduate students in actuarial sciences; graduate students in economics, business and finance; and professionals and technicians operating in insurance and pension areas will find this book of benefit.
This book provides computational tools that readers can use to flourish in the retirement income industry. Each chapter describes recipe-like algorithms and explains how to implement them via simple scripts in the freely available R coding language. Students can use those skills to generate quantitative answers to the most common questions in retirement income planning, as well as to develop a deeper understanding of the finance and economics underlying the field itself. The book will be an excellent asset for experienced students who are interested in advanced wealth management, and specifically within courses that focus on holistic modeling of the retirement income process. The material will also be useful to current and future wealth management professionals within the financial services industry. Readers should have a solid understanding of financial principles, as well as a rudimentary background in economics and accounting.
The 2019 edition of Pensions at a Glance highlights the pension reforms undertaken by OECD countries over the last two years. Moreover, two special chapters focus on non-standard work and pensions in OECD countries, take stock of different approaches to organising pensions for non-standard workers in the OECD, discuss why non-standard work raises pension issues and suggest how pension settings could be improved.
In 2019, MIT hosted a 75th birthday symposium in honor of Robert C. Merton. The event included presentations by students and colleagues explaining the influence Merton has had on the profession and on their ideas. Each presenter focused on a specific aspect of Merton’s life and contributions so that the audience could gain a full picture of Merton’s influence while avoiding repetition across presentations. The brief contains edited transcripts of some of the speeches and panel discussions that took place at the symposium. The presentations cover Merton’s career, highlighting both his foundational work on continuous time finance and the functional approach to understanding organizations as well as recent work on retirement security and trust. Some of the presentations unveil new aspects of his life. Merton’s father, Robert K. Merton, was one of the most important sociologists of the 20th century, being the originator of concepts such as role model, unanticipated consequences, and self-fulfilling prophecies. Another of the presentations makes a convincing case for Merton as the first financial engineer; the presenter argues that a body of knowledge becomes a science when a field of engineering emerges from it. If that is the case, this brief achieves two goals. It celebrates the influence of Merton on the theory and practice of finance through a series of engaging presentations, and it traces the birth of finance as a science on its own.