A study published in Risk Sciences introduces a framework for endowment contingency funds, emphasizing the implementation of actuarially fair contributions to ensure equitable compensation among participants.
By creating a mutual fund that consolidates contributions from individuals exposed to predefined adverse events—such as critical illness, mortality, or survival—the framework allows for a systematic allocation of resources.
The framework involves participants agreeing to contribute fixed amounts to the fund, which are then pooled together. Upon the occurrence of an adverse event, the total contributions are distributed equally among claimants, ensuring that compensation remains fair and consistent, without the financial burden typically associated with commercial insurance models.
The volatility of payouts is notably mitigated as the size of the participant pool increases; the influence of large numbers leads to a stabilization of benefits. Mathematical modeling reveals that as the pool approaches infinity, the distribution of payouts converges to that offered by traditional insurance mechanisms, meeting the criteria for actuarial fairness.
“The proposed endowment contingency funds supply a highly cost-effective alternative to conventional insurance, circumventing administrative expenses and profit margins while still fulfilling the participants' protection needs,” shares corresponding author Michel Denuit. “Additionally, the model's alignment with mutuality enhances its appeal as a viable option for community-based risk-sharing.”
Furthermore, researchers explored the implications of the model within the context of mutual aid and survivor funds, drawing comparisons with Takaful insurance schemes.
“By demonstrating the feasibility of this risk-sharing mechanism, we gain meaningful theoretical insights into the principles of fair risk pooling,” says co-author Christian Robert. “The underlying constructs set forth not only encourage a collective approach to managing uncertainty but also reinforce the social responsibility inherent in communal financial strategies.”
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Contact the author: Michel Denuit, Institute of Statistics, Biostatistics and Actuarial Science - ISBA Louvain Institute of Data Analysis and Modeling - LIDAM UCLouvain, Louvain-la-Neuve, Belgium. Email: michel.denuit@uclouvain.be
Christian Y. Robert, Laboratory in Finance and Insurance - LFA CREST - Center for Research in Economics and Statistics ENSAE, Paris, France.
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Journal
Risk Sciences
Method of Research
Computational simulation/modeling
Subject of Research
Not applicable
Article Title
Equal compensations under actuarially fair contributions in endowment contingency funds.
COI Statement
The author Michel Denuit is an Editorial Board Member for Risk Sciences and was not involved in the editorial review or the decision to publish this article. All the authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.