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The Economics of a Secondary Market for Variable Annuities

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  • Thorsten Moenig
  • Nan Zhu

Abstract

This article demonstrates that a secondary market for U.S. variable annuity policies may be immediately welfare enhancing to all parties involved: the insurer, the original policyholder, and a third-party investor. Our model reflects relevant market frictions—here, the product’s tax benefits—that produce differing valuation perspectives for the three parties. This allows for policy transfers that benefit all parties simultaneously, including the insurance company, irrespective of the level of control that it exerts over this secondary market. We illustrate our insights first with a theoretical two-period model, followed by an empirically motivated numerical analysis. Our numerical results suggest a best-estimate total welfare gain of 2.6% of the initial investment amount under the optimal secondary market structure.

Suggested Citation

  • Thorsten Moenig & Nan Zhu, 2021. "The Economics of a Secondary Market for Variable Annuities," North American Actuarial Journal, Taylor & Francis Journals, vol. 25(4), pages 604-630, November.
    • Handle: RePEc:taf:uaajxx:v:25:y:2021:i:4:p:604-630
    DOI: 10.1080/10920277.2020.1802598
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    Cited by:

    1. Anne Mackay & Marie-Claude Vachon, 2023. "On an Optimal Stopping Problem with a Discontinuous Reward," Papers 2311.03538, arXiv.org, revised Nov 2023.

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