Enhanced Annuities: Drivers and Barriers of Supply and Demand

Gatzert, Nadine; Klotzki, Udo

doi:10.2139/ssrn.2584310

Cited by 4 publications

(8 citation statements)

References 18 publications

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“…In addition, Benartzi et al. () examined the phenomenon of the annuity puzzle in their literature review in order to identify the factors that can explain its existence and develop policy proposals to stimulate annuity demand, while Gatzert and Klotzki () more specifically focus on factors that affect the demand for and supply of enhanced annuities based on a literature review and an empirical survey concerning the German market. Finally, Zietz () studied the literature on demand for life insurance in general.…”

Section: Introductionmentioning

confidence: 99%

What Do We Know About Annuitization Decisions?

Alexandrova¹,

Gatzert²

2019

Risk Manage Insurance Review

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Against the background of aging societies and increasing life expectancies, the protection of individuals from outliving their savings has become increasingly relevant. Annuities represent insurance against longevity risk and can prevent old‐age poverty. The aim of this article is to present the current state of theoretical, empirical and experimental evidence with regard to annuitization decisions. Toward this end, we conduct a systematic literature review that includes 89 articles. Based on this, we study welfare effects of mandatory annuitization, annuitization rates and the optimal fraction of wealth to be annuitized, as well as determinants of retirees’ choice to annuitize and their impact on annuity demand. Finally, we present possible solutions for overcoming the low uptake of annuities based on its causes. One main result is that behavioral biases in annuitization decisions particularly require considerably more theoretical research and empirical evidence, and that theoretical models already appear to well explain empirically observed annuitization rates.

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Section: Introductionmentioning

confidence: 99%

What Do We Know About Annuitization Decisions?

Alexandrova¹,

Gatzert²

2019

Risk Manage Insurance Review

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“…The pricing variables added to traditional age/sex annuity pricing mirror the results from the crossover studies. Consistent with the frailty studies, enhanced annuity insurers include data on medical history and fatal diseases into pricing, with some insurers also offering enhanced benefits to smokers (Gatzert and Klotzki, 2015;Wuppermann, 2017). In addition to these variables, Brown and McDaid (2003) identify a broader list of potential enhanced annuity pricing variables, including participation in religious activities, years of education, and BMI, consistent with the crossover literature.…”

Section: Comparisons With Annuity Pricingmentioning

confidence: 53%

“…First, although personal annuities have traditionally been priced with minimal insurance under-writing, based only on the applicant's age and sex, the last decade has witnessed greater interest in developing more extensive risk classification systems for these products. Much of this interest is related to the development of enhanced (also known as substandard or medically underwritten) annuity products to impaired applicants who provide evidence to insurers about having health issues that often lead to an earlier death in the hopes of obtaining higher annuity payments while alive (Fong, 2015;Gatzert and Klotzki, 2015). In addition, some countries have considered the adoption of mandatory annuitization statutes to stabilize retirement income across retirees and reduce dependence on social insurance programs, with the United Kingdom (UK) mandating annuitization in the late 1990s through the mid-2010s.…”

Section: Applying Aristotelian Equality Standards To Annuity Pricingmentioning

confidence: 99%

“…While insurers have traditionally priced standard annuities using only age and gender, the ECJ has criticized such age/sex underwriting as overly heterogeneous. In contrast, the evolution of the enhanced annuity market 27 has prompted some insurers to increase the number of pricing variables in enhanced annuity risk classification systems (Gatzert and Klotzki, 2015). The pricing variables added to traditional age/sex annuity pricing mirror the results from the crossover studies.…”

Section: Comparisons With Annuity Pricingmentioning

confidence: 99%

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Insurance pricing discrimination and Aristotelian equality: an application to annuity pricing

Cather¹

2021

JIR

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International courts often apply the social justice standard of Aristotelian equality—treating like people alike and unlike people differently—to cases involving insurance pricing discrimination. This article examines whether the use of insurance pricing variables like gender and race results in discriminatory pricing categories consisting of heterogeneous policyowners, in violation of Aristotelian equality. This article applies this discrimination standard to the pricing of annuities, drawing from studies investigating the racial mortality crossover, findings that show that the mortality rate of Black Americans falls below the rate of White Americans at advanced ages. Based on the crossover literature, this study demonstrates how race-based annuity pricing would be discriminatory because it results in heterogeneous pricing within racial pricing categories, but that insurers can control for this heterogeneity by using the wider variety of annuity pricing data (e.g., medical history, diseases, and smoking) developed in the enhanced annuity submarket. The article demonstrates how the increased use of data analytics in insurance pricing to control for heterogeneity is consistent with Aristotelian equality.

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“…Strictly speaking, the latter type of product is known as a life care annuity (Brown & Warshawsky, 2013), an enhanced annuity (Hoermann & Ruß, 2008;Brown & Scahill, 2010;Ramsay & Oguledo, 2020) or an embedded care annuity (Vidal-Melia et al, 2016). Recently, significant literature has grown around this topic (Gatzert & Klotzki, 2016;Eling & Ghavibazoo, 2019;Lambregts & Schut, 2019). The fundamental idea behind the life care annuity is based on the combination of longevity and disability risks in a single product (Alegre et al, 2002;Rickayzen, 2007;Levantesi & Menzietti, 2007;Levantesi & Menzietti, 2012), which often translates into shifting a part of the pension benefits into LTC benefits (Spillman et al, 2003;Wu et al, 2016;Vidal-Melia et al, 2017).…”

Section: Introductionmentioning

confidence: 99%

Valuation of long-term care options embedded in life annuities

et al. 2021

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In most industrialised countries, one of the major societal challenges is the demographic change coming along with the ageing of the population. The increasing life expectancy observed over the last decades underlines the importance to find ways to appropriately cover the financial needs of the elderly. A particular issue arises in the area of health, where sufficient care must be provided to a growing number of dependent elderly in need of long-term care (LTC) services. In many markets, the offering of life insurance products incorporating care options and LTC insurance products is generally scarce. In our research, we therefore examine a life annuity product with an embedded care option potentially providing additional financial support to dependent persons. To evaluate the care option, we determine the minimum price that the annuity provider requires and the policyholder’s willingness to pay for the care option. For the latter, we employ individual utility functions taking account of the policyholder’s condition. We base our numerical study on recently developed transition probability data from Switzerland. Our findings give new and realistic insights into the nature and the utility of life annuity products proposing an embedded care option for tackling the financing of LTC needs.

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Enhanced Annuities: Drivers and Barriers of Supply and Demand

Cited by 4 publications

References 18 publications

What Do We Know About Annuitization Decisions?

What Do We Know About Annuitization Decisions?

Insurance pricing discrimination and Aristotelian equality: an application to annuity pricing

Valuation of long-term care options embedded in life annuities

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