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The costs of annuitizing

Author

Listed:
  • Cecilia Dassatti

    (Banco Central del Uruguay)

  • Rodrigo Lluberas

    (Banco Central del Uruguay)

Abstract

This study analyzes the costs associated with annuitization and provides estimates of the margin that an efficient insurance company could charge in order to cover these costs. Using data from the financial statements filed by insurance companies to the regulator, we estimate a translog cost function following the stochastic frontier methodology. Our dataset consists on quarterly balance sheet information from 13 Uruguayan insurance companies over the period 2005-2015. We find that the average cost inefficiency is 17.8% and that there is substantial heterogeneity across firms. In addition, our results show that the annuity margin that an efficient insurance company could charge in order to cover its administrative costs is of 11 basis points over the market long-term interest rate.

Suggested Citation

  • Cecilia Dassatti & Rodrigo Lluberas, 2016. "The costs of annuitizing," Documentos de trabajo 2016004, Banco Central del Uruguay.
    • Handle: RePEc:bku:doctra:2016004
    as

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    File URL: https://www.bcu.gub.uy/Estadisticas-e-Indicadores/Documentos%20de%20Trabajo/4.2016.pdf
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    References listed on IDEAS

    as
    1. Jeffrey R. Brown & Olivia S. Mitchell & James M. Poterba, 2001. "The Role of Real Annuities and Indexed Bonds in an Individual Accounts Retirement Program," NBER Chapters, in: Risk Aspects of Investment-Based Social Security Reform, pages 321-370, National Bureau of Economic Research, Inc.
    2. Eling, Martin & Luhnen, Michael, 2010. "Efficiency in the international insurance industry: A cross-country comparison," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1497-1509, July.
    3. Andrew M. Yuengert, 1993. "The measurement of efficiency in life insurance estimates of a mixed normal-gamma error model," Research Paper 9308, Federal Reserve Bank of New York.
    4. Olivia S. Mitchell, 1999. "New Evidence on the Money's Worth of Individual Annuities," American Economic Review, American Economic Association, vol. 89(5), pages 1299-1318, December.
    5. James M. Poterba & Mark Warshawsky, 2000. "The Costs of Annuitizing Retirement Payouts from Individual Accounts," NBER Chapters, in: Administrative Aspects of Investment-Based Social Security Reform, pages 173-206, National Bureau of Economic Research, Inc.
    6. Estelle James & Xue Song, 2001. "Annuities Markets Around the World: Money’s Worth and Risk Intermediation," CeRP Working Papers 16, Center for Research on Pensions and Welfare Policies, Turin (Italy).
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    More about this item

    Keywords

    annuities; insurance firms; annuity margin; stochastic frontier; cost effciency;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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