Working Papers

Yuxin Zhou, Len Patrick Garces, Yang Shen, Michael Sherris, and Jonathan Ziveyi

Abstract: Risk-sharing rules have been applied to mortality pooling products to ensure these products are actuarially fair and self-sustaining. However, most of the existing studies on the risk-sharing rules of mortality pooling products assume deterministic mortality rates, whereas the literature on mortality models provides empirical evidence suggesting that mortality rates are stochastic and correlated between cohorts. In this paper, we extend existing risk-sharing rules and introduce a new risk-sharing rule, named the joint expectation rule, to ensure the actuarial fairness of mortality pooling products while accounting for stochastic and correlated mortality rates. Moreover, we perform a systematic study of how the choice of risk-sharing rule, the volatility and correlation of mortality rates, pool size, account balance, and age affect the distribution of mortality credits. Then, we explore a dynamic pool that accommodates heterogeneous members and allows new entrants, and we track the income payments for different members over time. Furthermore, we compare different risk-sharing rules under the scenario of a systematic shock in mortality rates. We find that the account balance affects the distribution of mortality credits for the regression rule, while it has no effect under the proportional, joint expectation, and alive-only rules. We also find that a larger pool size increases the sensitivity to the deviation in total mortality credits for cohorts with mortality rates that are volatile and highly correlated with those of other cohorts, under the stochastic regression rule. Finally, we find that risk-sharing rules significantly influence the effect of mortality shocks on fund balances since, under different risk-sharing rules, fund balances have different sensitivities to deviations in mortality credits.

Keywords: Risk-sharing rule, mortality pooling product, stochastic mortality rate, correlated mortality rate

Juergen Jung and Chung Tran

Abstract: In this paper we first provide empirical evidence on the long-lasting effects of poor health on stock market participation, asset portfolio composition, and the wealth gap over the lifecycle in the U.S. To quantify the importance of this health-wealth portfolio channel we formulate a structural lifecycle model that incorporates elastic labor supply, asset portfolio choice, and household heterogeneity in health status, health expenditure, health insurance, and earnings ability. Through counterfactual simulations, we demonstrate that the health-wealth portfolio channel plays a significant role in explaining variations in wealth gaps across groups and over the lifecycle. Finally, our findings highlight the important role of the health insurance system in reducing wealth inequality.

Keywords: Health and income risks, Health insurance, Heterogeneity, Lifecycle savings, Risky and safe assets, Asset portfolio, Inequality.

Cheng Wan, Hazel Bateman, Hanming Fang, and Katja Hanewald

Abstract: In many low- and middle-income countries, social insurance provides basic pension benefits with limited cover for illness and care costs, while private insurance markets are underdeveloped. Using an online survey of retirement insurance choices in urban China, we explore the stated demand for longevity, critical illness and long-term care (LTC) insurance. Most preferred is critical illness and LTC insurance cover for 50% of the expected out-of-pocket costs, and a monthly annuity of around 20% of average urban disposable income. We find that access to critical illness and LTC insurance can release precautionary savings for the purchase of annuities. Better product knowledge, higher financial competence, stronger bequest motives, and lower risk tolerance are linked to higher demand for critical illness and LTC cover but lower demand for annuities. Our results inform the development of retirement insurance markets in countries with ageing populations and gaps in social and private insurance.

Keywords: long-term care insurance, critical illness insurance, annuities, financial competence, risk aversion, health care

Yunxiao (Chelle) Wang, Katja Hanewald, Zilin (Scott) Shao and Hazel Bateman

Abstract: Reverse mortgage markets remain relatively small internationally, with one frequently cited reason being bequest motives. We study the role of reverse mortgages in intergenerational financial planning as a tool for families to bring forward bequests. We develop a new two-generation lifecycle model with parental altruism to compare the welfare gains of bequests and early bequests (inter vivos gifts) for homeowning parents and adult children seeking to purchase their first home. The two-generation model accounts for house price risk, interest rate risk, investment risk, wage growth, health shocks, long-term care costs, private pensions, and means-tested public pensions. The model results suggest that families across a range of wealth levels can enjoy large welfare gains when the parent uses a reverse mortgage both for retirement income and to gift the adult child a first home deposit. By replacing parent bequest utility with altruism, our model better captures the welfare gains of early bequest for both generations. Compared to literature which shows reverse mortgage demand decreasing as bequest motives increase, we find that as the parent cares more about the child’s wellbeing, through altruism, utility gains from reverse mortgages for the family increase.

Keywords: Retirement income, reverse mortgage, inter-generational transfers, altruism, gifting, long-term care costs, bank of mum and dad

Supplementary Material