Inflation Insurance for Australian Annuitants

Andrew Formica and Geoffrey Kingston
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Andrew Formica: AMP Society, 1–3 Alfred Street, Circular Quay NSW 2000.
Geoffrey Kingston: Department of Economics University of New South Wales Kensington NSW 2033.

Australian Journal of Management, 1991, vol. 16, issue 2, 145-163

Abstract: In the burgeoning market for immediate annuities, products offering payments escalated at a fixed rate of 5% per year have been greatly outselling their CPI-indexed counterparts, thanks to the lure of high early payments. Modifying recent analogies between inflation insurance of annuity streams and sequences of call options on synthetic CPI futures, we estimate the cost of insuring fixed-escalation annuity streams against prespecified drops in purchasing power. With such insurance, annuitants could enjoy reasonably high early payments without risking an inordinately low standard of living after some years of sustained high inflation, or towards the end of a long life.

Keywords: ANNUITIES; OPTIONS; CPI (search for similar items in EconPapers)
Date: 1991
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Persistent link: https://EconPapers.repec.org/RePEc:sae:ausman:v:16:y:1991:i:2:p:145-163

DOI: 10.1177/031289629101600203

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