Artificial intelligence has come a long way... but at least in some areas, it still has a long way to go.
We asked ChatGPT to "explain modern tontines" and got this response.
"A modern tontine is a financial product that is similar to a traditional tontine, but with some key differences. A traditional tontine is a type of investment or savings plan in which a group of individuals pool their money together and, as members of the group die, their shares are distributed among the remaining members. The last surviving member of the group receives the entirety of the remaining funds. Modern tontines, on the other hand, are typically structured as a type of annuity or life insurance policy, in which a group of individuals make regular payments into a pool of funds. As members of the group die, the remaining members continue to receive payouts from the pool, but the payouts typically decrease over time. The key difference between a traditional tontine and a modern tontine is that in a modern tontine, the payouts continue for the lifetime of the remaining members, whereas in a traditional tontine, the payouts end when the last surviving member dies."
Unfortunately, this answer contains a few inaccuracies. But before we can analyze them, we first need to understand that ChatGPT defines a traditional tontine as a collective savings or investment scheme in which there is a last surviving member. We could nit-pick over that definition, but let's be charitable and go with it for the purpose of this article. Instead, let us focus on its explanation of a modern tontine:
"...are typically structured as a type of annuity or life insurance policy"
This statement makes us wonder whether ChatGPT thinks modern tontines include the 19th century product known as tontine insurance. That's not very modern, and in fact it was these old-style tontines that gave tontines such a bad name nearly 120 years ago.
Fact : Modern tontines can be structured as insurance offerings or as investment funds or trusts or managed accounts or any number of ways. Because a pure tontine neither transfers risk nor guarantees anything, no insurance company is necessary.
"...in which a group of individuals make regular payments into a pool of funds..."
There are two issues with this line.
Fact : There is no requirement that individuals must make regular payments (contributions) into a modern tontine. They could if they wish, but only a single investment contribution is necessary.
Fact : A modern tontine does not have to be structured as a "pool of funds." It could be organized as a single investment fund, as multiple funds, as individually managed accounts, as brokerage accounts, or as trusts. It is possible that each member could have a different investment portfolio.
"...the payouts typically decrease over time"
Fact : Although a modern tontine could be designed to deliver decreasing payouts, it is much more common to think of payouts that typically increase over time to offset inflation.
"The key difference between a traditional tontine and a modern tontine is that in a modern tontine, the payouts continue for the lifetime of the remaining members, whereas in a traditional tontine, the payouts end when the last surviving member dies."
This statement about "the key difference" is very confusing — are these two statements even different?
Fact : Modern tontines can be open-ended, running in perpetuity such that there is never a last member because new generations of people can continually enter the pool to replace those who die.
Fact : Modern tontines can have payouts that continue for the lifetime of each member. Note, however, that other types of payouts are also possible in a modern tontine. For example, payouts could occur steadily over a fixed horizon (e.g., 10 or 20 years) or could only at the very end of a fixed horizon.