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How Deep Is the Annuity Market Participation Puzzle?

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  • Joachim Inkmann
  • Paula Lopes
  • Alexander Michaelides

Abstract

Using microeconomic data for the United Kingdom, we analyze the empirical determinants of voluntary annuity market demand. We find that annuity market participation increases with financial wealth, life expectancy, and education and decreases with other pension income and a possible bequest motive for surviving spouses. We then show that these empirically motivated determinants of annuity market participation have the same, quantitatively important, effects in a life-cycle model of annuity and life insurance demand, saving, and portfolio choice. Moreover, reasonable preference parameters predict annuity demand levels comparable to the data. For stockholders, a strong bequest motive can simultaneously generate balanced portfolios and low annuity demand. The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

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Bibliographic Info

Article provided by Society for Financial Studies in its journal Review of Financial Studies.

Volume (Year): 24 (2011)
Issue (Month): 1 ()
Pages: 279-319

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Handle: RePEc:oup:rfinst:v:24:y:2011:i:1:p:279-319

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Cited by:
  1. Arun, Thankom & Bendig, Mirko & Arun, Shoba, 2012. "Bequest Motives and Determinants of Micro Life Insurance in Sri Lanka," World Development, Elsevier, vol. 40(8), pages 1700-1711.
  2. Lee Lockwood, 2012. "Bequest Motives and the Annuity Puzzle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 226-243, April.
  3. Motohiro Yogo, 2009. "Portfolio Choice in Retirement: Health Risk and the Demand for Annuities, Housing and Risky Assets," Working Papers, Center for Retirement Research at Boston College wp2009-3, Center for Retirement Research, revised Jan 2009.
  4. Yogo, Motohiro & Koijen, Ralph S.J. & Van Nieuwerburgh, Stijn, 2014. "Health and Mortality Delta: Assessing the Welfare Cost of Household Insurance Choice," Staff Report 499, Federal Reserve Bank of Minneapolis.
  5. Joachim Inkmann & Alexander Michaelides, 2012. "Can the Life Insurance Market Provide Evidence for a Bequest Motive?," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 79(3), pages 671-695, 09.
  6. Blake, David & Wright, Douglas & Zhang, Yumeng, 2014. "Age-dependent investing: Optimal funding and investment strategies in defined contribution pension plans when members are rational life cycle financial planners," Journal of Economic Dynamics and Control, Elsevier, vol. 38(C), pages 105-124.
  7. Antoine Bommier & François Le Grand, 2012. "Too Risk Averse to Purchase Insurance? A Theoretical Glance at the Annuity Puzzle," CER-ETH Economics working paper series 12/157, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
  8. Vanya Horneff & Raimond Maurer & Olivia S. Mitchell & Ralph Rogalla, 2013. "Optimal Life Cycle Portfolio Choice with Variable Annuities Offering Liquidity and Investment Downside Protection," NBER Working Papers 19206, National Bureau of Economic Research, Inc.
  9. Stijn Van Nieuwerburgh & Motohiro Yogo & Ralph S.J. Koijen, 2009. "Optimal Health and Longevity Insurance," 2009 Meeting Papers 185, Society for Economic Dynamics.
  10. Thomas Post, 2009. "Individual Welfare Gains from Deferred Life-Annuities under Stochastic Lee-Carter Mortality," SFB 649 Discussion Papers SFB649DP2009-022, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  11. Jeffrey R. Brown & Arie Kapteyn & Erzo F.P. Luttmer & Olivia S. Mitchell, 2013. "Decision Complexity as a Barrier to Annuitization," NBER Working Papers 19168, National Bureau of Economic Research, Inc.
  12. Hans Fehr, 2009. "Computable Stochastic Equilibrium Models and Their Use in Pension- and Ageing Research," De Economist, Springer, vol. 157(4), pages 359-416, December.
  13. Cocco, João F. & Gomes, Francisco J., 2012. "Longevity risk, retirement savings, and financial innovation," Journal of Financial Economics, Elsevier, vol. 103(3), pages 507-529.
  14. Raimond Maurer & Olivia S. Mitchell & Ralph Rogalla & Ivonne Siegelin, 2014. "Accounting and Actuarial Smoothing of Retirement Payouts in Participating Life Annuities," NBER Working Papers 20124, National Bureau of Economic Research, Inc.
  15. Antoine Bommier & François Grand, 2014. "Too risk averse to purchase insurance?," Journal of Risk and Uncertainty, Springer, vol. 48(2), pages 135-166, April.

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