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Dynamic tonuity: Adapting retirement benefits to a changing environment

Published online by Cambridge University Press:  05 March 2025

An Chen ,
Yusha Chen Open the ORCID record for Yusha Chen [Opens in a new window]  and
Manuel Rach Open the ORCID record for Manuel Rach [Opens in a new window]
An Chen
Affiliation:
Institute of Insurance Science Ulm University 89081 Ulm, Germany
Yusha Chen*
Affiliation:
School of Finance Southwestern University of Finance and Economics 611130 Chengdu, China
Manuel Rach
Affiliation:
Institute of Insurance Economics University of St. Gallen 9000 St. Gallen, Switzerland
*
Corresponding author: Yusha Chen; Email: cys_0416@outlook.com
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Abstract

The tonuity, proposed by Chen et al. ((2019) ASTIN Bulletin: The Journal of the IAA, 49(1), 530.), is a combination of an immediate tontine and a deferred annuity. However, its switching time from tontine to annuity is fixed at the moment the contract is closed, possibly becoming sub-optimal if mortality changes over time. This article introduces an alternative tonuity product, wherein a dynamic switching condition is pivotal, relying on the observable mortality trends within a reference population. The switching from tontine to annuity then occurs automatically once the condition is satisfied. Using data from the Human Mortality Database and UK Continuous Mortality Investigation, we demonstrate that, in a changing environment, where an unforeseen mortality or longevity shock leads to an unexpected increase or decrease in mortality rates, the proposed dynamic tonuity contract can be preferable to the regular tonuity contract.

Keywords

Retirement plantonuitydynamic switching timetwo-population stochastic mortalityG22G52J32

Information

Type
Research Article
Information
ASTIN Bulletin: The Journal of the IAA , Volume 55 , Issue 2 , May 2025 , pp. 352 - 373
Copyright
© The Author(s), 2025. Published by Cambridge University Press on behalf of The International Actuarial Association

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