Survival Pessimism and the Demand for Annuities

Abstract

The “annuity puzzle” refers to the fact that annuities are rarely purchased despite the longevity insurance they provide. Most explanations for this puzzle assume that individuals have accurate expectations about their future survival. We provide evidence that individuals misperceive their mortality risk, and study the demand for annuities in a setting where annuities are priced by insurers on the basis of objectively-measured survival probabilities but in which individuals make purchasing decisions based on their own subjective survival probabilities. Subjective expectations have the capacity to explain significant rates of non-annuitization, yielding a quantitatively important explanation for the annuity puzzle.

A behavioral gap in survival beliefs

“…Previous literature drawing on data from longitudinal ageing studies (e.g., Kleinjans & Van Soest, 2014;O'Dea & Sturrock, 2023) stress that some individuals answer "0%" or "100%" or give the focal point answer "50%" to the survival questions, that might indicate a lack of understanding of the question. Consistently with previous studies, we test the sensitivity of the results of our regression analysis to the removal of "0%," "100%," and "50%" answers to the survival probability question.…”

“…Several theoretical and empirical studies propose to address the above‐mentioned empirical findings referring to subjective beliefs on survival instead of assuming actuarially motivated estimates (see, e.g., Inkmann et al, 2011; Wu et al, 2015). O'Dea and Sturrock (2023) show that, when survival pessimism dominates, individuals perceive the annuity pricing based on objective survival probabilities as unfair. Fang and Wu (2020) show that when policyholders are overconfident about their future mortality risk, the equilibrium life insurance contracts are overly front‐loaded compared with the rational benchmark and that the life settlement market mitigates the loss due to mortality misperception.…”

Longevity, Health and Housing Risks Management in Retirement

“…10 See Inkmann et al (2011), Lockwood (2012, Hubener et al (2014), Peijnenburg et al (2016Peijnenburg et al ( , 2017, Laitner et al (2018), André et al (2022) andO'Dea andSturrock (2023). See Horneff et al (2008) and Maurer et al (2013) for models involving deferred variable annuities.…”

When the Household Becomes Environmentally Friendly—Dynamic Simulation of Hybrid Energy System’s Feasibility

“…Additionally, batteries have the capability of making the industrial and transportation sectors more environmentally friendly, which, in turn, positively impacts the electrification of other sectors [10]. By 2030, the worldwide need for batteries is projected to surpass 2000 GWh [11]. Although consumer electronics were widely used in 2020, their low energy capacities, such as those found in phones, resulted in a comparatively low demand in terms of gigawatts.…”