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LIFE INSURANCE AND PENSION CONTRACTS I: THE TIME ADDITIVE LIFE CYCLE MODEL

Published online by Cambridge University Press:  03 November 2014

Knut K. Aase
Knut K. Aase*
Affiliation:
The Norwegian School of Economics, 5045 Bergen and Centre of Mathematics for Applications (CMA), University of Oslo
*
E-Mail: [email protected]
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Abstract

We analyze optimal consumption in the life cycle model by introducing life and pension insurance contracts. The model contains a credit market with biometric risk, and market risk via risky securities. This idealized framework enables us to clarify important aspects of life insurance and pension contracts. We find optimal pension plans and life insurance contracts where the benefits are state dependent. We compare these solutions both to the ones of standard actuarial theory, and to policies offered in practice. Implications of this include what role the insurance industry may play to improve welfare. The relationship between substitution of consumption and risk aversion is highlighted in the presence of a consumption puzzle. One problem related portfolio choice is discussed the horizon problem. Finally, we present some comments on longevity risk and cohort risk.

Keywords

The life cycle modelpension insuranceoptimal life insurancelongevity riskthe horizon problemconsumption puzzle
Type
Research Article
Information
ASTIN Bulletin: The Journal of the IAA , Volume 45 , Issue 1 , January 2015 , pp. 1 - 47
Copyright
Copyright © ASTIN Bulletin 2014 

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