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Cohort mortality risk or adverse selection in annuity markets?

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  • Cannon, Edmund
  • Tonks, Ian

Abstract

We show that tests for adverse selection in annuity markets using prices are not identified. Within the UK annuity market, different annuity products create the potential for a Rothschild-Stiglitz separating equilibrium as different risk types could choose different annuities. Empirical analyses using the “money's worth” suggest that prices are indeed consistent with this explanation. However, we show that this pattern of annuity prices would also result from the actions of regulated annuity providers who must reserve against cohort mortality risk. Annuity products that might attract different consumer risk types also have different risks for the provider.

Suggested Citation

  • Cannon, Edmund & Tonks, Ian, 2016. "Cohort mortality risk or adverse selection in annuity markets?," Journal of Public Economics, Elsevier, vol. 141(C), pages 68-81.
    • Handle: RePEc:eee:pubeco:v:141:y:2016:i:c:p:68-81
    DOI: 10.1016/j.jpubeco.2016.07.002
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    Cited by:

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    2. Javier Pla-Porcel & Manuel Ventura-Marco & Carlos Vidal-Meliá, 2017. "How do unisex life care annuities embedded in a pay-as-you-go retirement system affect gender redistribution?," Documentos de Trabajo del ICAE 2017-11, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    3. Daniel Bauer & Jochen Russ & Nan Zhu, 2020. "Asymmetric information in secondary insurance markets: Evidence from the life settlements market," Quantitative Economics, Econometric Society, vol. 11(3), pages 1143-1175, July.
    4. Dillingh, Rik, 2016. "Empirical essays on behavioral economics and lifecycle decisions," Other publications TiSEM 0e2143e3-bd86-4302-90eb-e, Tilburg University, School of Economics and Management.
    5. Aquilina, Matteo & Baker, Robert & Majer, Tommaso, 2017. "The Money’s Worth of annuities in the UK between 2006 and 2014," The Journal of the Economics of Ageing, Elsevier, vol. 9(C), pages 208-218.

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