Adverse selection in the annuity market with sequential and simultaneous insurance demand (original) (raw)

Adverse Selection in the Annuity Market When Payoffs Vary Over the Time of Retirement

This paper investigates the effect of adverse selection and price competition on the private annuity market in a model with two retirement periods. In this framework annuity companies can offer contracts with different payoffs over the periods of retirement. Varying the time structure of the payoffs affects annuity demand and welfare of individuals with low and high life expectancy in different ways. By this, annuity purchasers can be separated according to their survival probabilities. Our main finding is that a Nash-Cournot equilibrium may not exist; if one exists, it will be a separating equilibrium. On the other hand, even if a separating equilibrium does not exist, a Wilson pooling equilibrium exists.

Non-Exclusivity and Adverse Selection: An Application to the Annuity Market

SSRN Electronic Journal, 2000

Using a common agency framework, we characterize possible equilibria when annuities contracts are not exclusive. We discuss theoretical and empirical implications of these equilibria. First, we show that at equilibrium prices are not linear. Then we characterize an equilibrium. We provide conditions for existence and show that this equilibrium is efficient.

Adverse selection and moral hazard in the annuity markets

2004

Several authors have analysed the case in which individuals possess hidden information about their longevity. Davies and Kuhn [2] have considered the related case in which individuals can take hidden actions to affect their longevity. In this work I will consider the case in which the annuity market is characterized by both adverse selection and moral hazard; with private information all individuals, and in particular low-risk individuals, suffer from negative estenalities.

Adverse Selection in Insurance Markets: Policyholder Evidence from the U.K. Annuity Market

Journal of Political Economy, 2004

We use a unique data set of annuities in the U.K. to test for adverse selection. We find systematic relationships between ex-post mortality and annuity characteristics, such as the timing of payments and the possibility of payments to the annuitants' estate. These patterns are consistent with the presence of asymmetric information. However, we find no evidence of substantive mortality differences by annuity size. These results suggest that the absence of selection on one contract dimension does not preclude its presence on others. This highlights the importance of considering detailed features of insurance contracts when testing theoretical models of asymmetric information.

A general equilibrium analysis of annuity rates in the presence of aggregate mortality risk

Uncertain Demographics and Fiscal Sustainability, 2008

This paper explores the pricing of annuities in a structural overlapping generations model in which the mortality rate of people when old is uncertain. A market clearing price for annuities is established below the fair price. At this price the willingness of old people to pay the young to carry old people's aggregate mortality risk is balanced by the willingness of the young to bear the risk. The model suggests that aggregate mortality risk is unlikely to be a major influence on annuity pricing.

Uncertain lifetimes and the welfare enhancing properties of annuity markets and social security

Journal of Public Economics, 1985

This paper explores the implications of social security programs and annuity markets through which agents, who are characterized by different distributions of length of lifetime, share deathrelated risks. When annuity markets operate, a non-discriminatory social security program affects only the intragenerational allocation of resources. In the absence of private information regarding individual survival probabilities, such a program will lead to a non-optimal intragenerational allocation of resources. However, the presence of adverse selection considerations gives rise to a Pareto improving role for a mandatory non-discriminatory social security program.

The Life Insurance Market: Adverse Selection Revisited

2008

This paper finds evidence for the presence of adverse selection in the life insurance market, a conclusion contrasting with the existing literature. In particular, we find a significant and positive correlation between the decision to purchase life insurance and subsequent mortality, conditional on risk classification. Individuals who died within a 12year time window after a base year were 19 percent more likely to have taken up life insurance in that base year than were those who survived the time window. Moreover, we find that individuals are most likely to obtain life insurance four to six years before death. Methodologically, we address sample-selection and omitted-variables issues overlooked in the previous literature.

Annuities and Aggregate Mortality Risk ∗

2007

This paper explores the effect of aggregate mortality risk on the pricing of annuities. It uses a two-period OLG model; in the first period, ‘young ’ people have a zero probability of death, and in the second period ‘old ’ people face an initially unknown risk of death. Old people can either carry their aggregate mortality risk, or buy annuities which are sold by young people. A market-clearing price for such annuities is established. The alternative where annuities are purchased from the government is also explored, and this is found to dominate the private market solution in welfare terms.