The Optimal Allocation of Longevity Risk with Perfect Insurance Markets
By Antoine Bommier (ETH Zürich) & Hélène Schernberg (ETH Zurich)
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.
Source: SSRN
