The fair surrender value of a tontine

Jan-Hendrik Weinert

No 26/17, ICIR Working Paper Series from Goethe University Frankfurt, International Center for Insurance Regulation (ICIR)

Abstract: A tontine provides a mortality driven, age-increasing payout structure through the pooling of mortality. Because a tontine does not entail any guarantees, the payout structure of a tontine is determined by the pooling of individual characteristics of tontinists. Therefore, the surrender decision of single tontinists directly affects the remaining members' payouts. Nevertheless, the opportunity to surrender is crucial to the success of a tontine from a regulatory as well as a policyholder perspective. Therefore, this paper derives the fair surrender value of a tontine, first on the basis of expected values, and then incorporates the increasing payout volatility to determine an equitable surrender value. Results show that the surrender decision requires a discount on the fair surrender value as security for the remaining members. The discount intensifies in decreasing tontine size and increasing risk aversion. However, tontinists are less willing to surrender for decreasing tontine size and increasing risk aversion, creating a natural protection against tontine runs stemming from short-term liquidity shocks. Furthermore we argue that a surrender decision based on private information requires a discount on the fair surrender value as well.

Keywords: Life Insurance; Tontines; Annuities; Life Insurance Surrender (search for similar items in EconPapers)
JEL-codes: D81 D82 D86 G22 G23 H55 H75 I13 J14 J32 N23 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-age and nep-ias
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:icirwp:2617

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