prof. martin boyer, ph.d. professeur cefa en finance et ...€¦ · professeur cefa en finance et...
TRANSCRIPT
![Page 1: Prof. Martin Boyer, Ph.D. Professeur CEFA en Finance et ...€¦ · Professeur CEFA en Finance et assurance . Directeur du (GR)2R2P2 . Fellow CIRANO . HEC Montréal . En collaboration](https://reader034.vdocuments.us/reader034/viewer/2022042709/5f4d134e9705a7137d0f452f/html5/thumbnails/1.jpg)
1
Prof. Martin Boyer, Ph.D. Professeur CEFA en Finance et assurance
Directeur du (GR)2R2P2
Fellow CIRANO
HEC Montréal
En collaboration avec Franca Glenzer (Goethe Universität Frankfurt)
Québec, Mars 2015
![Page 2: Prof. Martin Boyer, Ph.D. Professeur CEFA en Finance et ...€¦ · Professeur CEFA en Finance et assurance . Directeur du (GR)2R2P2 . Fellow CIRANO . HEC Montréal . En collaboration](https://reader034.vdocuments.us/reader034/viewer/2022042709/5f4d134e9705a7137d0f452f/html5/thumbnails/2.jpg)
2
1. Motivation 2. Model Setup 3. Full-information Contracts 4. Asymmetric Information 5. Simulation and Empirical Analysis 6. Discussion and Conclusion
![Page 3: Prof. Martin Boyer, Ph.D. Professeur CEFA en Finance et ...€¦ · Professeur CEFA en Finance et assurance . Directeur du (GR)2R2P2 . Fellow CIRANO . HEC Montréal . En collaboration](https://reader034.vdocuments.us/reader034/viewer/2022042709/5f4d134e9705a7137d0f452f/html5/thumbnails/3.jpg)
3
In old age, individuals face two main financial risks:
Long-term care (LTC) risk: the risk of having a chronic medical condition that requires medical attention, either at home or in an institution (nursing home)
Longevity Risk: The risk of outliving ones savings
![Page 4: Prof. Martin Boyer, Ph.D. Professeur CEFA en Finance et ...€¦ · Professeur CEFA en Finance et assurance . Directeur du (GR)2R2P2 . Fellow CIRANO . HEC Montréal . En collaboration](https://reader034.vdocuments.us/reader034/viewer/2022042709/5f4d134e9705a7137d0f452f/html5/thumbnails/4.jpg)
4
The need for long-term care increases with an ever-aging population
The costs for long-term care can be substantial, up to downright catastrophic for many individuals, especially if needed over a long period: ◦ US$21 on average per hour for a home health aide ◦ US$6,235 on average per month for a semi-private room in a
nursing home
Estimated cost for LTC in Canada over the next 35 years: $1.2 trillion
Very low insurance penetration
Source: US Department of Health and Human Services, 2010
![Page 5: Prof. Martin Boyer, Ph.D. Professeur CEFA en Finance et ...€¦ · Professeur CEFA en Finance et assurance . Directeur du (GR)2R2P2 . Fellow CIRANO . HEC Montréal . En collaboration](https://reader034.vdocuments.us/reader034/viewer/2022042709/5f4d134e9705a7137d0f452f/html5/thumbnails/5.jpg)
5
Two systems for insuring against longevity risk: ◦ Defined Benefit (DB) Plan: Determines the amount to be paid out
to the retiree
◦ Defined Contribution (DC) Plan: Determines the payments into the the pension plan. Benefit payments to the retiree depends on the investment outcome
Recent development: shift from DB to DC (i.e. shifting of risk to the savers/retirees)
![Page 6: Prof. Martin Boyer, Ph.D. Professeur CEFA en Finance et ...€¦ · Professeur CEFA en Finance et assurance . Directeur du (GR)2R2P2 . Fellow CIRANO . HEC Montréal . En collaboration](https://reader034.vdocuments.us/reader034/viewer/2022042709/5f4d134e9705a7137d0f452f/html5/thumbnails/6.jpg)
6
![Page 7: Prof. Martin Boyer, Ph.D. Professeur CEFA en Finance et ...€¦ · Professeur CEFA en Finance et assurance . Directeur du (GR)2R2P2 . Fellow CIRANO . HEC Montréal . En collaboration](https://reader034.vdocuments.us/reader034/viewer/2022042709/5f4d134e9705a7137d0f452f/html5/thumbnails/7.jpg)
7
What is more beneficial from the individual perspective? It depends… ◦ On income ◦ On the ability to compensate for a potentially bad investment
outcome and a lower annuity payment under a DC scheme ◦ On consumption needs upon retirement ( LTC!!!) ◦ On bequest motives
Despite the shift from DB to DC, DC is not always better
than DB (Cocco and Lopes, 2011; Brown, 2014)
So when is a DB plan better than a DC plan, and vice versa – considering the risk of needing long-term care?
![Page 8: Prof. Martin Boyer, Ph.D. Professeur CEFA en Finance et ...€¦ · Professeur CEFA en Finance et assurance . Directeur du (GR)2R2P2 . Fellow CIRANO . HEC Montréal . En collaboration](https://reader034.vdocuments.us/reader034/viewer/2022042709/5f4d134e9705a7137d0f452f/html5/thumbnails/8.jpg)
8
Who knows what when Individuals often have private information about their risk
characteristics ◦ Asymmetric information problem ◦ Potentially: adverse selection and market failure
Here: very particular situation because ◦ Contracts (pension plan and LTC insurance) are very long-term ◦ Young individuals have no experience concerning their future
health/disability status (abstracting from genetic conditions), but they do learn about it over time
Our hypothesis: Whether an individual prefers a DB or a DC plan will depend on her risk type and the timing of the insurance purchase (and I’ll explain why).
![Page 9: Prof. Martin Boyer, Ph.D. Professeur CEFA en Finance et ...€¦ · Professeur CEFA en Finance et assurance . Directeur du (GR)2R2P2 . Fellow CIRANO . HEC Montréal . En collaboration](https://reader034.vdocuments.us/reader034/viewer/2022042709/5f4d134e9705a7137d0f452f/html5/thumbnails/9.jpg)
9
1. Motivation 2. Model Setup 3. Full-information Contracts 4. Asymmetric Information 5. Simulation and Empirical Analysis 6. Discussion and Conclusion
![Page 10: Prof. Martin Boyer, Ph.D. Professeur CEFA en Finance et ...€¦ · Professeur CEFA en Finance et assurance . Directeur du (GR)2R2P2 . Fellow CIRANO . HEC Montréal . En collaboration](https://reader034.vdocuments.us/reader034/viewer/2022042709/5f4d134e9705a7137d0f452f/html5/thumbnails/10.jpg)
10
An individual either survives until old age or not
Upon old age, the individual is either in need of LTC or in good health
Different individuals ◦ differ wrt their longevity risk, but
◦ all have the same probability of needing care given that they
reach old age
![Page 11: Prof. Martin Boyer, Ph.D. Professeur CEFA en Finance et ...€¦ · Professeur CEFA en Finance et assurance . Directeur du (GR)2R2P2 . Fellow CIRANO . HEC Montréal . En collaboration](https://reader034.vdocuments.us/reader034/viewer/2022042709/5f4d134e9705a7137d0f452f/html5/thumbnails/11.jpg)
11
Live in nursing home
Live healthy
Die
p
1-p
1-q
q
Live
DB DC +LTC
Info
rmat
ion
acqu
isiti
on
![Page 12: Prof. Martin Boyer, Ph.D. Professeur CEFA en Finance et ...€¦ · Professeur CEFA en Finance et assurance . Directeur du (GR)2R2P2 . Fellow CIRANO . HEC Montréal . En collaboration](https://reader034.vdocuments.us/reader034/viewer/2022042709/5f4d134e9705a7137d0f452f/html5/thumbnails/12.jpg)
12
1 2
Individuals choose between a DC or a DB plan; If DB, retirement contract is written
Individuals learn about their health status
Individuals may purchase long-term care insurance; Purchase of annuities for those who chose DC
Nature chooses between three states of the world: Die, Live healthy, Live in nursing home
Payoffs are distributed
3 4 5
![Page 13: Prof. Martin Boyer, Ph.D. Professeur CEFA en Finance et ...€¦ · Professeur CEFA en Finance et assurance . Directeur du (GR)2R2P2 . Fellow CIRANO . HEC Montréal . En collaboration](https://reader034.vdocuments.us/reader034/viewer/2022042709/5f4d134e9705a7137d0f452f/html5/thumbnails/13.jpg)
13
An individual has a von Neumann-Morgenstern utility which depends on when insurance is purchased:
We assume competitive markets, i.e. insurance companies make zero profit. The premia thus are:
![Page 14: Prof. Martin Boyer, Ph.D. Professeur CEFA en Finance et ...€¦ · Professeur CEFA en Finance et assurance . Directeur du (GR)2R2P2 . Fellow CIRANO . HEC Montréal . En collaboration](https://reader034.vdocuments.us/reader034/viewer/2022042709/5f4d134e9705a7137d0f452f/html5/thumbnails/14.jpg)
14
1. Motivation 2. Model Setup 3. Full-information Contracts 4. Asymmetric Information 5. Simulation and Empirical Analysis 6. Discussion and Conclusion
![Page 15: Prof. Martin Boyer, Ph.D. Professeur CEFA en Finance et ...€¦ · Professeur CEFA en Finance et assurance . Directeur du (GR)2R2P2 . Fellow CIRANO . HEC Montréal . En collaboration](https://reader034.vdocuments.us/reader034/viewer/2022042709/5f4d134e9705a7137d0f452f/html5/thumbnails/15.jpg)
15
Independent of the risk type,
Individuals buy full insurance on the LTC insurance market
And annuitize 100% of their lifetime income (perfect
income smoothing)
Result from classic insurance economics for policies with fixed loading and risk-averse individuals
![Page 16: Prof. Martin Boyer, Ph.D. Professeur CEFA en Finance et ...€¦ · Professeur CEFA en Finance et assurance . Directeur du (GR)2R2P2 . Fellow CIRANO . HEC Montréal . En collaboration](https://reader034.vdocuments.us/reader034/viewer/2022042709/5f4d134e9705a7137d0f452f/html5/thumbnails/16.jpg)
16
1. Motivation 2. Model Setup 3. Full-information Contracts 4. Asymmetric Information 5. Simulation and Empirical Analysis 6. Discussion and Conclusion
![Page 17: Prof. Martin Boyer, Ph.D. Professeur CEFA en Finance et ...€¦ · Professeur CEFA en Finance et assurance . Directeur du (GR)2R2P2 . Fellow CIRANO . HEC Montréal . En collaboration](https://reader034.vdocuments.us/reader034/viewer/2022042709/5f4d134e9705a7137d0f452f/html5/thumbnails/17.jpg)
17
Live in nursing home
Live healthy
Die
p
1-p
1-q
q
Live
DC +LTC
Info
rmat
ion
acqu
isiti
on
![Page 18: Prof. Martin Boyer, Ph.D. Professeur CEFA en Finance et ...€¦ · Professeur CEFA en Finance et assurance . Directeur du (GR)2R2P2 . Fellow CIRANO . HEC Montréal . En collaboration](https://reader034.vdocuments.us/reader034/viewer/2022042709/5f4d134e9705a7137d0f452f/html5/thumbnails/18.jpg)
18
Two risk-types in the longevity risk-dimension, H and L, with pH>pL
The maximization problem is then
In an economy where individuals privately know their type and where insurers are restricted to make zero profit for each of the types (i.e., the Rothschild-Stiglitz world), we find that ◦ Both risk types purchase full LTC insurance ◦ The high-risk type receives first-best allocation (perfect income
smoothing) ◦ The low-risk type must signal his type by choosing less-than-perfect
income smoothing
![Page 19: Prof. Martin Boyer, Ph.D. Professeur CEFA en Finance et ...€¦ · Professeur CEFA en Finance et assurance . Directeur du (GR)2R2P2 . Fellow CIRANO . HEC Montréal . En collaboration](https://reader034.vdocuments.us/reader034/viewer/2022042709/5f4d134e9705a7137d0f452f/html5/thumbnails/19.jpg)
19
Live in nursing home
Live healthy
Die
p
1-p
1-q
q
Live
DB LTC
Info
rmat
ion
acqu
isiti
on
![Page 20: Prof. Martin Boyer, Ph.D. Professeur CEFA en Finance et ...€¦ · Professeur CEFA en Finance et assurance . Directeur du (GR)2R2P2 . Fellow CIRANO . HEC Montréal . En collaboration](https://reader034.vdocuments.us/reader034/viewer/2022042709/5f4d134e9705a7137d0f452f/html5/thumbnails/20.jpg)
20
Two risk-types in the longevity risk-dimension, H and L, with pH>pL
The maximization problem is then more complicated since agents must anticipate, when choosing their retirement contract, what their long-term care insurance contract will look like.
… and has no longer an analytic solution
![Page 21: Prof. Martin Boyer, Ph.D. Professeur CEFA en Finance et ...€¦ · Professeur CEFA en Finance et assurance . Directeur du (GR)2R2P2 . Fellow CIRANO . HEC Montréal . En collaboration](https://reader034.vdocuments.us/reader034/viewer/2022042709/5f4d134e9705a7137d0f452f/html5/thumbnails/21.jpg)
21
1. Motivation 2. Model Setup 3. Full-information Contracts 4. Asymmetric Information 5. Simulation and Empirical Analysis 6. Discussion and Conclusion
![Page 22: Prof. Martin Boyer, Ph.D. Professeur CEFA en Finance et ...€¦ · Professeur CEFA en Finance et assurance . Directeur du (GR)2R2P2 . Fellow CIRANO . HEC Montréal . En collaboration](https://reader034.vdocuments.us/reader034/viewer/2022042709/5f4d134e9705a7137d0f452f/html5/thumbnails/22.jpg)
22
The optimal allocations under a DC-like scheme are such that both agents have full long-term care insurance.
The optimal allocations under a DB-like scheme are such that each agent purchases partial long-term care insurance, and more so for the high risk agent.
![Page 23: Prof. Martin Boyer, Ph.D. Professeur CEFA en Finance et ...€¦ · Professeur CEFA en Finance et assurance . Directeur du (GR)2R2P2 . Fellow CIRANO . HEC Montréal . En collaboration](https://reader034.vdocuments.us/reader034/viewer/2022042709/5f4d134e9705a7137d0f452f/html5/thumbnails/23.jpg)
2015-10-08 23
LTC
insu
ranc
e ch
oice
Inco
me
smoo
thin
g
Preference
![Page 24: Prof. Martin Boyer, Ph.D. Professeur CEFA en Finance et ...€¦ · Professeur CEFA en Finance et assurance . Directeur du (GR)2R2P2 . Fellow CIRANO . HEC Montréal . En collaboration](https://reader034.vdocuments.us/reader034/viewer/2022042709/5f4d134e9705a7137d0f452f/html5/thumbnails/24.jpg)
2015-10-08 24
Inco
me
smoo
thin
g
Preference
LTC
insu
ranc
e ch
oice
![Page 25: Prof. Martin Boyer, Ph.D. Professeur CEFA en Finance et ...€¦ · Professeur CEFA en Finance et assurance . Directeur du (GR)2R2P2 . Fellow CIRANO . HEC Montréal . En collaboration](https://reader034.vdocuments.us/reader034/viewer/2022042709/5f4d134e9705a7137d0f452f/html5/thumbnails/25.jpg)
25
We varied the model parameters to see what pension scheme individuals will prefer…
The greater is… The more likely is…
DC
DB
DB
DB
DC
Risk aversion DB
![Page 26: Prof. Martin Boyer, Ph.D. Professeur CEFA en Finance et ...€¦ · Professeur CEFA en Finance et assurance . Directeur du (GR)2R2P2 . Fellow CIRANO . HEC Montréal . En collaboration](https://reader034.vdocuments.us/reader034/viewer/2022042709/5f4d134e9705a7137d0f452f/html5/thumbnails/26.jpg)
26
1. Motivation 2. Model Setup 3. Full-information Contracts 4. Asymmetric Information 5. Simulation and Empirical Analysis 6. Discussion and Conclusion
![Page 27: Prof. Martin Boyer, Ph.D. Professeur CEFA en Finance et ...€¦ · Professeur CEFA en Finance et assurance . Directeur du (GR)2R2P2 . Fellow CIRANO . HEC Montréal . En collaboration](https://reader034.vdocuments.us/reader034/viewer/2022042709/5f4d134e9705a7137d0f452f/html5/thumbnails/27.jpg)
27
Risk Full information
DC DB
Low risk LTC 100%
100%
<100%
Longevity 100%
100%
High risk LTC 100%
100%
<100%
Longevity 100%
<100%
![Page 28: Prof. Martin Boyer, Ph.D. Professeur CEFA en Finance et ...€¦ · Professeur CEFA en Finance et assurance . Directeur du (GR)2R2P2 . Fellow CIRANO . HEC Montréal . En collaboration](https://reader034.vdocuments.us/reader034/viewer/2022042709/5f4d134e9705a7137d0f452f/html5/thumbnails/28.jpg)
28
Quel avenir pour l’assurance de soins longue-durée? ◦ Soyons optimistes
Quels dangers à l’horizon? ◦ Soyons pessimistes