The Sluggish and Asymmetric Reaction of Life Annuity Prices to Changes in Interest Rates

37 Pages Posted: 9 Aug 2016

See all articles by Narat Charupat

Narat Charupat

McMaster University - DeGroote School of Business

Mark J. Kamstra

York University - Schulich School of Business; Rady School of Management

Moshe A. Milevsky

York University - Schulich School of Business

Date Written: September 2016

Abstract

Many assume that in the short run, annuity prices promptly and efficiently respond to changes in interest rates. Using a unique database of quotes, we show this is not the case. Prices are less sensitive to changes in rates than expected, and responses are asymmetric. Prices react more rapidly and with greater sensitivity to an increase than to a decrease in rates. The results are robust, but there is a small degree of heterogeneity in the responses of different insurance companies. When rates increase, larger firms are slightly quicker to improve prices. The opposite is true when rates decline. In sum, we show that the microstructure of annuity dynamics is more complicated than (simply) adding mortality credits to bond yields.

Suggested Citation

Charupat, Narat and Kamstra, Mark J. and Milevsky, Moshe Arye, The Sluggish and Asymmetric Reaction of Life Annuity Prices to Changes in Interest Rates (September 2016). Journal of Risk and Insurance, Vol. 83, Issue 3, pp. 519-555, 2016. Available at SSRN: https://ssrn.com/abstract=2820368 or http://dx.doi.org/10.1111/jori.12061

Narat Charupat (Contact Author)

McMaster University - DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada
(905) 525-9140 ext. 23987 (Phone)

Mark J. Kamstra

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

Moshe Arye Milevsky

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

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