Is Adverse Selection in the Annuity Market a Big Problem?

Anthony Webb

IB#40

Introduction

An annuity provides an individual or a household with insurance against living too long. In exchange for a one-time premium payment, the insurer agrees to make periodic payments to the insured for life. In theory, annuities seem like a valuable product for many retirees given an uncertain date of death. However, in practice, few people purchase annuities. Researchers who have studied this puzzle have concluded that annuities are not “actuarially fair,” that is, for someone with average life expectancy they provide only about 74 to 85 cents in income for every dollar in premium payments…