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A gap between rational annuitization price for producer and price for customer

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  • Nikolai Dokuchaev

    (School of Electrical Engineering, Computing and Mathematical Sciences)

Abstract

This paper studies pricing of insurance products focusing on the pricing of annuities under uncertainty. This pricing problem is crucial for financial decision making and was studied intensively; however, many open questions still remain. In particular, there is the “annuity puzzle” related to certain inconsistency of the existing financial theory with the empirical observations for the annuities market. This paper suggests a pricing method based on the risk minimization such that both producer and customer seek to minimize the mean square hedging error accepted as a measure of risk. This leads to two different versions of the pricing problem: the selection of the annuity price given the rate of regular payments, and the selection of the rate of payments given the annuity price. It appears that solutions of these two problems are different. This can contribute to explanation for the “annuity puzzle.”

Suggested Citation

  • Nikolai Dokuchaev, 2019. "A gap between rational annuitization price for producer and price for customer," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 18(2), pages 147-154, April.
    • Handle: RePEc:pal:jorapm:v:18:y:2019:i:2:d:10.1057_s41272-018-00163-5
    DOI: 10.1057/s41272-018-00163-5
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    References listed on IDEAS

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    More about this item

    Keywords

    Annuities pricing; Risk minimization; Price disagreement; Annuity puzzle;
    All these keywords.

    JEL classification:

    • D46 - Microeconomics - - Market Structure, Pricing, and Design - - - Value Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets

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