Actuarial Seminar - Katja Hanewald (UNSW)

Title: Optimal portfolio choice with longevity and health insurance products: A developing country context.

Abstract: We derive the optimal portfolio for retirees in a developing country context facing uncertain lifespan, catastrophic medical expenditures, and long-term care costs. In the model, retirees can choose from a portfolio consisting of life annuities, critical illness insurance, long-term care insurance, and a savings account. The model is calibrated with Chinese data. We find that in emerging economies like China, an optimal portfolio highly depends on a retiree’s economic background. For retirees with an average pension, we find a substantial demand for critical illness insurance. An annuity is most important for those with a low pension. The demand for long-term care insurance is small. Choice of a lower health investment reduces the demand for critical illness insurance, but it provides larger welfare compared with an adequate health investment. These optimal insurance amounts for retirees with different economic backgrounds can inform governments and insurers to design innovative solutions for retirement and to advise retirement planning. Our research also provides insights for governments and individuals to decide which insurance to expand or to purchase under budget constraints. Finally, our study suggests that bundling longevity and health-related insurance products is one way to achieve a lower price and it can increase annuity demand for some retirees.