Rare events and annuity market participation

Lopes, Paula; Michaelides, Alexander

doi:10.1016/j.frl.2006.12.001

Cited by 25 publications

(18 citation statements)

References 21 publications

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“…62 Our results are reported in Table 18, where we set management fees and intentional bequests to zero. Previous models without correlated risks indicate that default risk has very little impact on annuitization (see, for example, the careful analysis by Lopes and Michaelides, 2007). Table 18 verifies that result by showing that counterparty risk affects annuitization only marginally in the Yaari version of our model without correlated risk.…”

Section: Bequest Motivessupporting

confidence: 74%

Optimal Annuitization with Stochastic Mortality and Correlated Medical Costs

Reichling

Smetters²

2015

American Economic Review

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The conventional wisdom since Yaari (1965) is that households without a bequest motive should fully annuitize their investments. Numerous frictions do not break this sharp result. We modify the Yaari framework by allowing a household's mortality risk itself to be stochastic due to health shocks. A lifetime annuity still helps to hedge longevity risk. But the annuity's remaining present value is correlated with medical costs, such as those for nursing home care, thereby reducing annuity demand, even without ad-hoc liquidity constraints. We find that most households should not hold a positive level of annuities, and many should hold negative amounts. (JEL D14, D82, G23, I12, J14, J26)

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Section: Bequest Motivessupporting

confidence: 74%

Optimal Annuitization with Stochastic Mortality and Correlated Medical Costs

Reichling

Smetters²

2015

American Economic Review

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“…10 See Lopes (2006). 11 Lopes and Michaelides (2007) argue that the possibility of a "rare event"like the default of the annuity provider cannot by itself explain the puzzle since such a rare event would change behavior for high risk aversion coe¢ cients but a high risk aversion simultaneously makes annuity demand stronger.…”

Section: Introductionmentioning

confidence: 99%

How Deep Is the Annuity Market Participation Puzzle?

Inkmann¹,

Lopes²,

Michaelides³

2010

Rev. Financ. Stud.

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282

162

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Using U.K. microeconomic data, we analyze the empirical determinants of voluntary annuity market demand. We …nd that annuity market participation increases with …nancial wealth, life expectancy and education and decreases with other pension income and a possible bequest motive for surviving spouses. We then show that these empirically-motivated determinants of annuity market participation have the same, quantitatively important, e¤ects in a life-cycle model of annuity demand, saving and portfolio choice. Moreover, reasonable preference parameters predict annuity demand levels comparable to the data, thereby questioning the conventional wisdom that limited annuity market participation is a puzzle to be explained.JEL Classi…cation: E21, H00.

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“… unfair pricing due to adverse selection and transaction costs (Friedman and Warshawsky, 1988; Mitchell et al, 1999); constant annuity payouts in combination with borrowing and short‐selling constraints may induce a suboptimal consumption profile (Brown, 2001; Gupta and Li, 2007); the existence of bequest motives (Yaari, 1965); the crowding‐out effect of government pensions (Mitchell et al, 1999; Brown and Poterba, 2000); intrafamily risk sharing (Kotlikoff and Spivak, 1981; Post, Gründl, and Schmeiser, 2006); default‐risk of the annuity providing insurer (Babbel and Merrill, 2006; Lopes and Michaelides, 2007; Huang, Tsai, and Tzeng, 2008); substitution of annuities by long‐term care insurance (Davidoff, 2008); and behavioral biases, like framing (Agnew et al, 2008; Brown et al, 2008). …”

Section: Introductionmentioning

confidence: 99%

“…default‐risk of the annuity providing insurer (Babbel and Merrill, 2006; Lopes and Michaelides, 2007; Huang, Tsai, and Tzeng, 2008);…”

Section: Introductionmentioning

confidence: 99%

Individual Annuity Demand Under Aggregate Mortality Risk

Schulze¹,

Post²

2009

Journal of Risk and Insurance

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Aggregate mortality risk-the risk that the mortality trend in a population changes in a nondeterministic way-and its implications for corporate decisions has recently been the subject of lively scientific discussion. We show that aggregate mortality risk is also a key determinant for individual annuitization decisions. Aggregate mortality risk appears to be a risk very difficult to transfer for individuals. Whether its existence leads to a higher or lower annuity demand depends on objective factors (e.g., insurers' vulnerability to aggregate mortality changes). Subjective factors (i.e., individuals' preferences) determine only the intensity of the annuity demand reaction to aggregate mortality risk. Our results are of significant importance not only for financial planning approaches of individual annuity buyers but also for strategic decisions in insurance companies and for solvency regulators. Furthermore, consideration of aggregate mortality risk may alleviate, but also intensify, the annuity puzzle. Copyright (c) The Journal of Risk and Insurance, 2009.

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Rare events and annuity market participation

Cited by 25 publications

References 21 publications

Optimal Annuitization with Stochastic Mortality and Correlated Medical Costs

Optimal Annuitization with Stochastic Mortality and Correlated Medical Costs

How Deep Is the Annuity Market Participation Puzzle?

Individual Annuity Demand Under Aggregate Mortality Risk

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