The costs of annuitising: are retirees fairly charged?

This study analyses the costs associated with annuitisation and provides estimates of what we call the “efficient annuity margin”, which is the margin over the market rate that an efficient insurance company could charge in order to cover its 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 data set consists of quarterly balance sheet information from all of the 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 which an efficient insurance company could charge in order to cover its administrative costs is 11 basis points over the market long-term interest rate. Our proposed method may allow the identification of the administrative and selection costs of providing annuities.