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What's Wrong with Annuity Markets?

Stephane Verani and Pei Cheng Yu

No 2021-044, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We show that the supply of life annuities in the U.S. is constrained by interest rate risk. We identify this effect using annuity prices offered by U.S. life insurers from 1989 to 2019 and exogenous variations in contract-level regulatory capital requirements. The cost of interest rate risk management accounts for at least half of the average life annuity markups or eight percentage points. The contribution of interest rate risk to annuity markups sharply increased after the great financial crisis, suggesting new retirees' opportunities to transfer their longevity risk are unlikely to improve in a persistently low interest rate environment.

Keywords: Life insurance; Annuities; Corporate bond market; Retirement; Interest rate risk (search for similar items in EconPapers)
JEL-codes: G10 G22 G32 (search for similar items in EconPapers)
Pages: 69 p.
Date: 2021-07-30
New Economics Papers: this item is included in nep-cwa, nep-ias, nep-isf and nep-rmg
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https://www.federalreserve.gov/econres/feds/files/2021044pap.pdf (application/pdf)

Related works:
Journal Article: What’s Wrong with Annuity Markets? (2024) Downloads
Working Paper: What's Wrong with Annuity Markets? (2020) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2021-44

DOI: 10.17016/FEDS.2021.044

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