To ask the main question that the first link brings to mind: What prevents a person from paying both a life insurance company and a longevity insurance company (possible the same company) relatively-small amounts of money each in exchange for either a relatively-large payout from the life insurance if the person dies early and a relatively-large payout from the longevity insurance if the person dies late?
To extend, what prevents a hypothetically large number of people to on average create this effect (even if each is disallowed from having both instead of just one or the other) and so creating a guaranteed total loss overall on the part of an insurance company?
Well, nothing, I would imagine; but keep in mind you are locking away a lot of money for a very long period of time, and the payouts are constantly adjusted with age—so unless the companies are outright screwing up and allowing an arbitrage opportunity, you reduce your expected returns either through not getting as much ‘relatively’ as you seem to expect or by opportunity cost (the companies returning your money, but having profited off the ‘float’ - which is how insurance companies have long been able to pay out ‘more’ than they should, because they made their profit off investing your money and not taking a percentage of your premiums).
I assume that the insurance company won’t sell a policy that is unfavorable to them in expectation. The way insurance companies make money is to set their rates so that they win on average. If you buy both life insurance and longevity insurance, you’ll find that the payments you put in exceed the value of the payout, at least in expectation.
Put another way: you’re dutch-booking yourself, not them.
You should really call this something else, since longevity insurance is already a thing.
(Don’t feel bad; I actually invented them independently before finally learning that it was already a mature industry. Oops.)
To ask the main question that the first link brings to mind: What prevents a person from paying both a life insurance company and a longevity insurance company (possible the same company) relatively-small amounts of money each in exchange for either a relatively-large payout from the life insurance if the person dies early and a relatively-large payout from the longevity insurance if the person dies late?
To extend, what prevents a hypothetically large number of people to on average create this effect (even if each is disallowed from having both instead of just one or the other) and so creating a guaranteed total loss overall on the part of an insurance company?
Well, nothing, I would imagine; but keep in mind you are locking away a lot of money for a very long period of time, and the payouts are constantly adjusted with age—so unless the companies are outright screwing up and allowing an arbitrage opportunity, you reduce your expected returns either through not getting as much ‘relatively’ as you seem to expect or by opportunity cost (the companies returning your money, but having profited off the ‘float’ - which is how insurance companies have long been able to pay out ‘more’ than they should, because they made their profit off investing your money and not taking a percentage of your premiums).
I assume that the insurance company won’t sell a policy that is unfavorable to them in expectation. The way insurance companies make money is to set their rates so that they win on average. If you buy both life insurance and longevity insurance, you’ll find that the payments you put in exceed the value of the payout, at least in expectation.
Put another way: you’re dutch-booking yourself, not them.
Or have I missed a nuance here?