Redistribution by Insurance Market Regulation: Analyzing a Ban on Gender-Based Retirement Annuities

54 Pages Posted: 25 May 2006 Last revised: 23 Jun 2006

See all articles by Amy Finkelstein

Amy Finkelstein

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

James M. Poterba

National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Department of Economics

Casey Rothschild

Wellesley College

Date Written: May 2006

Abstract

This paper shows how models of insurance markets with asymmetric information can be calibrated and solved to yield quantitative estimates of the consequences of government regulation. We estimate the impact of restricting gender-based pricing in the United Kingdom retirement annuity market, a market in which individuals are required to annuitize tax-preferred retirement savings but are allowed considerable choice over the annuity contract they purchase. After calibrating a lifecycle utility model and estimating a model of annuitant mortality that allows for unobserved heterogeneity, we solve for the range of equilibrium contract structures with and without gender-based pricing. Eliminating gender-based pricing is generally thought to redistribute resources from men to women, since women have longer life expectancies. We find that allowing insurers to offer a menu of contracts may reduce the amount of redistribution from men to women associated with gender-blind pricing requirements to half the level that would occur if insurers were required to sell a single pre-specified policy. The latter "one policy" scenario corresponds loosely to settings in which governments provide compulsory annuities as part of their Social Security program. Our findings suggest that recognizing the endogenous structure of insurance contracts is important for analyzing the economic effects of insurance market regulations. More generally, our results suggest that theoretical models of insurance market equilibrium can be used for quantitative policy analysis, not simply to derive qualitative findings.

Suggested Citation

Finkelstein, Amy and Poterba, James M. and Rothschild, Casey, Redistribution by Insurance Market Regulation: Analyzing a Ban on Gender-Based Retirement Annuities (May 2006). NBER Working Paper No. w12205. Available at SSRN: https://ssrn.com/abstract=900990

Amy Finkelstein (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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James M. Poterba

National Bureau of Economic Research (NBER) ( email )

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Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Casey Rothschild

Wellesley College ( email )

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United States

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