Pain or gain: competition and adverse selection in the annuity market

Qianqian Yang and Zihan Ye

Applied Economics, 2025, vol. 57, issue 36, 5597-5612

Abstract: Combining administrative data on insurance licences with individual-level data from four waves of the China Health and Retirement Longitudinal Study, we perform the unused observables test to investigate how insurance competition affects adverse selection in the annuity market. We find that increased market competition (measured by the presence of insurance branches) exacerbates both risk-based and preference-based adverse selection, particularly among respondents with weaker cognitive abilities and lower levels of social interaction. Our findings primarily align with the proposed information hypothesis, whereby increased market competition empowers individuals to make better-informed decisions based on multiple dimensions of private information. Nevertheless, digital finance development can moderate these exacerbation effects. The study highlights the critical importance of integrating the impact of market structure on adverse selection into policy design.

Date: 2025
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DOI: 10.1080/00036846.2025.2526857

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