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Fees in Tontines

Abstract This paper studies the incorporation of an explicit fee in modern tontine schemes and investigates how it affects the attractiveness of these products from the point of view of both the insurer and tontine participants. We consider a single initial fee and a variable fee, where the latter can be designed to meet different liquidity needs and risk aversions. We find that the “indifference fee”, the fee for the tontine at which the participants are indifferent to choosing between the tontine or an annuity, comes extremely close to that of the annuity. This presents insurers with a large spectrum of fees on which to base their charge for managing the tontine. Tontine providers and participants can agree on a fee level which makes tontines an attractive alternative to annuities for tontine participants and at the same time, allows insurers to retain a large part of the fee as a profit, given the low risk contained in a tontine. 1