Adverse Selection in the Chilean Annuity Market

30 Pages Posted: 17 Jul 2019 Last revised: 14 Jan 2020

See all articles by Eduardo Fajnzylber

Eduardo Fajnzylber

Adolfo Ibanez University - Escuela de Gobierno

Manuel Willington

Adolfo Ibanez University - Escuela de Gobierno

Date Written: October 1, 2019

Abstract

Asymmetric information about retirees’ longevity prospects can generate adverse selection in an annuity market. Longer lived individuals would be attracted to annuities and, in particular, to back-loaded ones. We analyze these two margins, using administrative data for the entire Chilean annuity market. We find consistent and sizeable evidence of adverse selection: individuals who choose to annuitize live 2 years more than those who do not. Among annuitants, similar effects (in the opposite direction) are found for the choice of a guaranteed period and front-loaded benefits. Despite the presence of adverse selection, usually associated with market unraveling, around 70% of women and 60% of men choose to annuitize.

Keywords: Adverse selection, annuities, guaranteed period, Chilean pension system

JEL Classification: G14, G22, G23, J32, J64

Suggested Citation

Fajnzylber, Eduardo and Willington, Carlos Manuel, Adverse Selection in the Chilean Annuity Market (October 1, 2019). Available at SSRN: https://ssrn.com/abstract=3402710 or http://dx.doi.org/10.2139/ssrn.3402710

Eduardo Fajnzylber

Adolfo Ibanez University - Escuela de Gobierno ( email )

Chile

Carlos Manuel Willington (Contact Author)

Adolfo Ibanez University - Escuela de Gobierno ( email )

Chile

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