What's Wrong with Annuity Markets?

69 Pages Posted: 10 Aug 2021 Last revised: 7 Sep 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: July, 2021

Abstract

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

Verani, Stephane and Yu, Pei Cheng, What's Wrong with Annuity Markets? (July, 2021). FEDS Working Paper No. 2021-44, Available at SSRN: https://ssrn.com/abstract=3902305 or http://dx.doi.org/10.17016/FEDS.2021.044

Stephane Verani (Contact Author)

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

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

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

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