Enhanced annuities pay higher pensions than standard annuities in case of a reduced life expectancy and are very prominent in the UK insurance market but not in other markets. The aim of this paper is to study drivers and barriers of supply and demand for enhanced annuities as well as potential market implications of their introduction, including implications for the standard immediate and deferred annuity markets, annuitization rates, and the so-called cannibalization effect, which may arise within the portfolio of standard annuities due to the enhanced annuity offering. The analysis is based on a comprehensive literature review and an empirical survey in the German life insurance market, which is also intended to offer insight for other industrialized countries with a similar situation in regard to the demographic development and an increasing need for private pensions.

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Purpose Due to the continuing low interest rate environment as well as the increase in acquisition costs, price transparency, cost transparency and competition with banks, the cost of life insurance becomes increasingly important for customers, insurers and shareholders. Against this background, the purpose of this paper is to study the development of insurers’ economies of scale in regard to administrative costs for four of the largest European life insurance markets. Design/methodology/approach The analysis on economies of scale is based on a comprehensive set of 477 life insurers in Germany, Italy, Spain and the UK, yearly data between 2000 and 2014, and regression calculations that are based on 4,855 observations. Findings The results show that economies of scale exist for all considered markets and for most of the considered years. However, the extent of economies of scale varies considerably across countries. Originality/value Overall, the existing academic literature on costs and corresponding economies of scale in life insurance primarily deals with analyses of total costs instead of administrative costs, a single year or a single market. This paper contributes to the existing literature by conducting an analysis of recent market dynamics and economies of scale in regard to administrative costs for the period from 2000 and 2014 for four of the largest European life insurance markets for which the respective data were available (Germany, Italy, Spain and the UK) and 477 life insurers in total. This is done by means of a log-log transformation of premiums and costs and a fixed effects model based on these transformed figures for 4,855 observations. In addition, for each market, the authors analyze the development of administrative costs for a total of 477 insurers.

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