Towards more complex product design

Ermanno Pitacco

4.1 INTRODUCTION: WHY MORE COMPLEX PRODUCTS?

The very simple structure of standard life annuities, while helpful for understanding the underlying financial and technical mechanisms, implies some features that might be perceived by customers as disadvantages, thus lowering the propensity to purchase life annuities.

Conversely, more complex structures can improve the characteristics of life annuity products and make them more attractive. For example, including other benefits in the “life annuity package”, or adding some flexibility to the time profile of benefits may be interesting solutions.

This chapter starts with a simple analysis of the basic features of standard life annuities. Then, we propose five questions and related (tentative) answers that can help in singling out the pros and cons of standard life annuities, as well as in understanding the need for more complex products.

Longevity risk is at the heart of life annuity transactions, from both the customer’s and the insurer’s perspectives, so it deserves special attention. Finally, to pave the way towards more complex life annuity products (addressed in the following chapters), we propose a classification scheme