Health-linked life annuities:  combining protection and retirement income

Health-linked life annuities: combining protection and retirement income


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Speaker(s): Ermanno Pitacco (University of Trieste)

Life annuities constitute an appropriate tool providing the retiree with a lifelong income. Nevertheless, we can observe that, in many countries, the propensity to convert into a life annuity the resources available at the retirement time is rather poor. Of course, good reasons, strictly related to the technical features of the “standard” life annuity, underpin the non-annuitization choice. In particular, as the life annuity is an illiquid asset in the retiree’s portfolio, the preference for income drawdown strategies can easily be understood.
In the framework of health insurance products, the long-term care (LTC) stand-alone policy provides resources to afford expenses caused by senescent disability. Hence, this insurance cover can be classified as a pure protection product. Nonetheless, its price is rather high, especially because of the safety loading that the insurer needs to charge in order to face pricing (and reserving) risks originated by rather poor statistical data. A barrier on the demand side then follows.
To stimulate the purchase of insurance products, in particular in the old-age segment of the insurance market, various alternative products can be conceived, some of which have actually been proposed.
Health-related life annuities can constitute an interesting alternative to traditional products. We note that linking the annuity benefit to the health status can be implemented according to two different approaches.
First, a “static” linking approach can be recognized when the benefit is linked to the individual’s health status at the time the annuity is purchased, and does not vary throughout the individual’s whole lifetime. This is the case of the special-rate annuities (also named “underwritten” annuities): the mortality assumption adopted in the annuity rate calculation depends on the health status of the client, assessed via underwriting process. Hence, for a given single premium, the annuity benefit is higher if the life expectancy is smaller.
A “dynamic” linking approach is conversely adopted if the benefit amount is adjusted, throughout time, according to the evolution of the individual’s health status. In this context, the care pension, which provides an uplift of the pension amount in the case the retiree enters a senescent disability status, constitutes an already implemented example.
More detailed linking mechanisms can be designed in the context of the dynamic approach, so that the annuity benefit varies according to the (estimated) need of financial resources. Of course, the more detailed is the linking mechanism, the more complex is the actuarial model as well as the data set required by the pricing and the reserving processes.
Looking at health-linked life annuities from a technical perspective, we note that an appropriate product design can improve the profitabililty and/or the risk profile of the insurer’s portfolio. In particular, we will first prove that the care pension is less exposed to pricing (and reserving) risks than other LTC insurance products. Then, we will show that underwritten annuities can raise the size and the profitability of a life annuity portfolio without worsening its risk profile.


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