A recent study in Risk Sciences introduces a pioneering framework for endowment contingency funds, focusing on adopting actuarially fair contributions to guarantee equitable compensation among participants. This innovative framework introduces a mutual fund structure that amalgamates contributions from individuals at risk of specific adverse events—such as critical illness, mortality, or longevity. This strategic design facilitates a systematic allocation of resources across the fund.

The framework’s operational model is straightforward yet effective. Participants agree to contribute fixed amounts to the fund, which are then aggregated into a collective pool. Should any adverse event transpire, the amassed contributions are evenly distributed among the affected claimants. This method ensures that the compensation is fair and consistent, alleviating the typical associated with conventional insurance models.

One of the standout features of this model is the reduced volatility of payouts, which diminishes as the participant pool expands. The principle of large numbers plays a crucial role here, stabilising benefits across the board. Advanced mathematical modelling further demonstrates that as the pool size grows indefinitely, the distribution of payouts aligns more closely with those provided by traditional insurance methods, thus satisfying the conditions for actuarial fairness.

Michel Denuit, the corresponding author, commented on the practical benefits of the proposed endowment contingency funds. He highlighted their cost-effectiveness, pointing out that these funds bypass the hefty administrative costs and profit margins typical of conventional insurance while still adequately meeting participants’ protection needs. Denuit also noted that the model’s adherence to the principles of mutuality boosts its attractiveness as a sustainable option for community-based risk-sharing.

Further explorations by the researchers shed light on the broader implications of this model within the realms of mutual aid and survivor funds, drawing analytical parallels with Takaful insurance schemes. These comparisons help in understanding the model’s effectiveness in the broader context.

Christian Robert, a co-author of the study, shared insights on the theoretical significance of this risk-sharing mechanism. He emphasised how the model offers a practical demonstration of fair risk pooling and contributes valuable theoretical insights into its principles. The framework’s foundation encourages a collective approach to managing uncertainty and underscores the social responsibility that comes with communal financial strategies. This approach provides a financial safety net and reinforces the sense of community and mutual support among participants.

More information: Michel Denuit et al, Equal compensations under actuarially fair contributions in endowment contingency funds, Risk Sciences. DOI: 10.1016/j.risk.2024.100005

Journal information: Risk Sciences Provided by Keai Communications Co., Ltd.