What's Wrong with Annuity Markets?
69 Pages Posted: 10 Aug 2021 Last revised: 7 Sep 2021
Date Written: July, 2021
We show that the supply of life annuities in the U.S. is constrained by interest rate risk. We identify this effect using annuity prices offered by U.S. life insurers from 1989 to 2019 and exogenous variations in contract-level regulatory capital requirements. The cost of interest rate risk management accounts for at least half of the average life 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.
JEL Classification: G10, G22, G32
Suggested Citation: Suggested Citation