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Adverse selection in tontines

Author

Listed:
  • Thorsten Moenig

    (Fox School of Business, Temple University)

  • Nan Zhu

    (Smeal College of Business, Pennsylvania State University)

Abstract

Several recent studies have cited the theoretical work of Valdez et al. [Insur: Math Econ 39(2):251–266, 2006] as evidence that there is less adverse selection in tontine-style products than in conventional life annuities. We argue that the modeling work and results of Valdez et al. [Insur: Math Econ 39(2):251–266, 2006] do not unconditionally support such a claim. Conducting our own analyses structured in a similar way but focusing on the relative instead of absolute change in annuity vs. tontine investments, we find that an individual with private information about their own survival prospect can potentially adversely select against tontines at the same, or even higher levels than against annuities. Our results suggest that the investor’s relative risk aversion is the driving factor of the relative susceptibility of the two products to adverse selection.

Suggested Citation

  • Thorsten Moenig & Nan Zhu, 2025. "Adverse selection in tontines," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 50(1), pages 6-38, March.
    • Handle: RePEc:pal:genrir:v:50:y:2025:i:1:d:10.1057_s10713-024-00104-w
    DOI: 10.1057/s10713-024-00104-w
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