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ACTUARIAL FAIRNESS AND SOLIDARITY IN POOLED ANNUITY FUNDS

Published online by Cambridge University Press:  25 July 2014

Catherine Donnelly*
Affiliation:
Department of Actuarial Mathematics and Statistics, and the Maxwell Institute for Mathematical Sciences, Heriot-Watt University, Edinburgh EH14 4AS, UK Phone: +44 131 451 3251, Fax: +44 131 451 3249 E-Mail: C.Donnelly@hw.ac.uk

Abstract

Various types of structures that enable a group of individuals to pool their mortality risk have been proposed in the literature. Collectively, the structures are called pooled annuity funds. Since the pooled annuity funds propose different methods of pooling mortality risk, we investigate the connections between them and find that they are genuinely different for a finite heterogeneous membership profile. We discuss the importance of actuarial fairness, defined as the expected benefits equalling the contributions for each member, in the context of pooling mortality risk and comment on whether actuarial unfairness can be seen as solidarity between members. We show that, with a finite number of members in the fund, the group self-annuitization scheme is not actuarially fair: some members subsidize the other members. The implication is that the members who are subsidizing the others may obtain a higher expected benefit by joining a fund with a more favorable membership profile. However, we find that the subsidies are financially significant only for very small or highly heterogeneous membership profiles.

Type
Research Article
Copyright
Copyright © ASTIN Bulletin 2014 

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