Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/167323
Authors: 
Weinert, Jan-Hendrik
Year of Publication: 
2017
Series/Report no.: 
ICIR Working Paper Series 26/17
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.
Subjects: 
Life Insurance
Tontines
Annuities
Life Insurance Surrender
JEL: 
D81
D82
D86
G22
G23
H55
H75
I13
J14
J32
N23
Document Type: 
Working Paper

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