Optimal design of unit-linked annuities in an inflationary environment: A utility-based analysis
Type
working paper
Date Issued
2025-09-19
Author(s)
Abstract
We analyze the utility-maximizing design of unit-linked and static hybrid annuities in an inflationary environment. In particular, we analyze the optimal fraction of wealth invested in a specific unit-linked component and a conventional annuity. In our analysis, we consider a financial market incorporating stochastic elements for interest rates, inflation, and equity returns. This allows us to evaluate nominal as well as real cash flows in the expected utility framework, delivering important insights on the impact of inflation on the optimal structure and design of unit-linked annuities. In particular, our results show that, assuming a positive correlation between equity returns and inflation over long periods of time, the optimization of real (inflation-adjusted) lifetime utility requires a higher allocation of wealth to the unit-linked component than is implied by traditional expected utility theory based on nominal cash flows.