Explaining low annuity demand: an optimal portfolio application to Japan

Sachi Purcal*, John Piggott

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

19 Citations (Scopus)


Using an optimizing financial planning model in the tradition of Merton and Richard we explore how individuals should determine their life insurance and annuity choices, given uncertainty about investment returns and mortality. Both consumption and bequests appear as arguments in the individual's preference function. The model explicitly recognizes the existence of social security in retirement, and of loadings on insurance premiums, due to administration costs in the life insurance and annuities markets. The model sheds light on the reasons for the thinness of voluntary life annuity markets worldwide. The relative importance of pre-existing annuitization through social security, the role of bequests, and premium loadings are quantitatively assessed within a single optimizing framework. Results are presented for a model specification calibrated to Japan.

Original languageEnglish
Pages (from-to)493-516
Number of pages24
JournalJournal of Risk and Insurance
Issue number2
Publication statusPublished - Jun 2008
Externally publishedYes


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