Faculty of Economics and Business Administration Publications Database

Participating Payout Annuities: Lessons from Germany

Rogalla, Ralph
Siegelin, Ivonne
Volume: 43
Number: 02
Pages: 159 - 187
Month: May
ISSN-Print: 0515-0361
Link External Source: Online Version
Year: 2013
Keywords: Surplus determination; Surplus distribution; Ssset-liability management; Investment risk; Systematic longevity risk
Abstract: This paper analyzes the framework of German participating payout life annuities (PLAs), which offer guaranteed minimum benefits as well as participation in insurers'' surpluses. We show that the process of sharing surpluses between shareholders and policyholders follows transparent and consistent rules. Subsequently, we develop an asset-liability model for a stylized German life insurer that offers PLAs to evaluate benefit variability and insurer stability given stochastic mortality and capital market developments. Our results suggest that guaranteed benefits can be provided with high credibility via PLAs, while, at the same time, annuitants receive attractive money''s worth ratios. Moreover, we show that it might be difficult to offer a fixed benefit annuity providing the same lifetime utility as a PLA for the same premium and a comparably low insolvency risk. Overall, PLA schemes may be an efficient way to deal with risk factors that are highly unpredictable and difficult to hedge over the long run, such as systematic longevity and investment risks.