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Demand for Annuities: Price Sensitivity, Risk Perceptions, and Knowledge

M. Martin Boyer (), Sebastien Box-Couillard and Pierre-Carl Michaud ()

Cahiers de recherche from Chaire de recherche Industrielle Alliance sur les enjeux économiques des changements démographiques

Abstract: The demand for voluntary individual lifetime annuities is low. To assess the reasons why, we designed a stated-preference experiment where we vary characteristics of annuity contracts to estimate individuals’ sensitivity to their value-to-cost ratio, a statistic also known as an annuity’s money’s worth. Using different measures of longevity risk and survival expectations, including individually tailored estimates from a micro-simulation model and subjective expectations, we investigate how knowledge of the product and mortality risk misperceptions affect the take-up as well as the sensitivity of the demand for annuities. We find that annuities are objectively not priced fairly, although they can appear to be fairly priced given an individual’s subjective mortality risk. We also find that demand is somewhat price-inelastic so that, given their current 10% take-up rate, lowering the price of annuities to fair actuarial levels could increase demand by at most 2 percentage points. Lack of knowledge of annuities explains another 1.2 percentage points. We find limited additional interest for deferred annuities compared to immediate ones although respondents are less price sensitive when evaluating deferred annuities.

Keywords: Life annuities’ money’s worth; Stated preferences; Subjective survival probabilities. (search for similar items in EconPapers)
JEL-codes: J26 D14 I13 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-age
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Working Paper: Demand for Annuities: Price Sensitivity, Risk Perceptions, and Knowledge (2018) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:lvl:criacr:1810

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