A Unified Framework for Insurance Demand and Mortality Immunization

Abstract

This article explores an individual’s optimal insurance choice and an insurer’s optimal product mix consisting of whole life insurance and deferred life annuities in a market equilibrium framework. On the demand side, the insured decides an optimal insurance choice by maximizing lifetime expected utility. On the supply side, an insurer chooses an optimal product mix by minimizing the conditional value-at-risk (CVaR) in its lines of business. By varying the loading for each insurance product, we match demand and supply of these products to clear the market. Our results suggest that market equilibria may occur when life insurance loading is relatively high and annuity loading is relatively low. This calls for attention from insurance regulators and life insurers to review insurance/annuity underwriting and pricing.