This book is a useful collection of prior, co-authored articles and papers that are primarily focused on the use of insurance solutions to decrease longevity and/or disability risks. It is a record and summary of an evolving point of view that looks at past history, considers the present when it was written and faces the future with a specific proposal for a new product innovation: Life Care Annuities. It is a serious and careful book that will likely be on many bookshelves as an important reference document.
Before reviewing specific aspects of the book, it may be necessary to help readers place it in the context of the U.S. Retirement Income Industries Association's View Across the (business) Silos that not only encompasses all defined contribution channels but also includes the retail channels.
The two key risks highlighted in the book – longevity and disability – are important Client-level risks that indeed can lead to compelling analytical – and at times academic – arguments in favor of insurance solutions in defined contribution channels. However, practicing retail advisors, who may not be the intended audience for this book, will point out that these risks are not the only Client-level risks that must be addressed and that there are other important categories of risk besides Client risks. For instance, the retirement risks presented in the curriculum of the Retirement Management Analyst (RMA) designation include a larger range of Political, Business and Client risks.
The book reflects the authors' strong experience, comfort level and perhaps even preference for institutional distribution channels and influence over related public policy. This makes it a carefully argued and well documented manifesto for a specific point of view and for proposals that would benefit institutionally distributed insurance solutions to the retirement income problem.
In Chapter One, Mark provides a useful introduction and overview for the rest of the book and many readers may find this chapter sufficient because it is well written in a precise and complete style.
In Chapter Two, also written by Mark, the book provides a review of trends and developments (up to the year 2009) in life annuity pricing and product design. This 2009 time stamp is important because it helps understand the values used in models that are described later in the book. In 2012, when the book was published and this review written and having lived and still living under a Zero Interest Rate Policy (ZIRP) in the interval, some of the values sometimes seem higher than current market pricing. It would be interesting to re-run the models with current values to see if or how this would affect some of the results and matching recommendations.
This is a complicated book with multiple chapters that are articulated in broad themes as follows: Chapter Three, co-authored with Jeff Brown provides the economic case and background for annuitization as contrasted with actual experience. Chapter Four, co-authored with Tomeka Hill, presents survey evidence on the attitude of older worker and current retirees towards life annuities and lump-sum distributions.
The following three chapters, all co-authored with Gaobo Pang, are very analytic and support one another: Chapter Five develops and compares management strategies for individuals in retirement. Chapter Six presents optimization results for the equity/bond/annuity portfolio constrained by the impact of uncertain health expenses. Chapter Seven presents a search for good (minimizing shortfall risk and weighing trade-offs between income and wealth) strategies for wealth distribution in retirement.
The next two chapters present various aspects of the Life Care Annuity innovation: Chapter Eight, co-authored with Christopher Murtaugh and Brenda Spillman, presents the case for the Life Care Annuity product innovation. Chapter Nine, co-authored with David Brazell and Jason Brown, explores the tax issues that one could expect with Life Care Annuities.
Reviewer note: A related type of hybrid product became legal in the USA at the beginning of 2010, when the 2006 Pension Protection Act resolving certain tax issues became effective. In this type of hybrid product, clients buy a form of fixed deferred annuity and a portion of their earnings covers the Long Term Care insurance premiums. The Life Care Annuity concept presented in this book is different because it is primarily based on offsetting the risks.
Chapter Ten, co-authored with Jeff Brown, reviews recent legal and regulatory developments in the retirement plan channels and discusses proposed changes. This final chapter closes the book both physically and in spirit.
As a way to summarize the book's merits (they are great), flaws (likely my errors of understanding) and placing it in the greater context (subject to all appropriate caveats related to the quantitative assumptions and calculations that go into models), I was struck by two numbers that may be significant when placed side by side:
— Life annuity clients may face a timing risk that can result in a pricing difference of 20%.
— The Life Care Annuity may represent a pricing advantage of 4 to 8% over traditional life annuities.
This spread appears wider than expected and the magnitudes reversed. Assuming that these two numbers can actually be compared to one another, one may come to think that market pricing noise is greater than product innovation efficiencies. True or false this suggests that there is a broad field of future, fruitful research and development not only in institutional product innovations but also in process solutions adapted to specific customer segments. This book is an important foundation stone on a long road of product and process innovation for both the institutional and retail markets.
