What's Wrong with Annuity Markets?

74 Pages Posted: 14 Aug 2020 Last revised: 21 Dec 2021

See all articles by Stephane Verani

Stephane Verani

Board of Governors of the Federal Reserve System

Pei Cheng Yu

UNSW Australia Business School, School of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: August 11, 2020

Abstract

We show that the supply of U.S. life annuities is constrained by interest rate risk. We identify this effect using annuity prices offered by life insurers from 1989 to 2019 and exogenous variations in contract-level regulatory capital requirements. The cost of interest rate risk management---conditional on the effect of adverse selection---accounts for about half of annuity markups or eight percentage points. The contribution of interest rate risk to annuity markups sharply increased after the Great Financial Crisis, suggesting new retirees' opportunities to transfer their longevity risk are unlikely to improve in a persistently low interest rate environment.

Keywords: life annuities; corporate bond market; retirement; interest rate risk; adverse selection

JEL Classification: G10; G22; G32

Suggested Citation

Verani, Stephane and Yu, Pei Cheng, What's Wrong with Annuity Markets? (August 11, 2020). UNSW Economics Working Paper 2020-10, Available at SSRN: https://ssrn.com/abstract=3672376 or http://dx.doi.org/10.2139/ssrn.3672376

Stephane Verani

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://www.federalreserve.gov/econresdata/stephane-verani.htm

Pei Cheng Yu (Contact Author)

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

HOME PAGE: http://pcyu.weebly.com

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