Finkelstein and Poterba (2002) Flashcards
(20 cards)
What is the difference between active and passive selection?
1) Active selection: Individuals with private mortality knowledge actively choose annuities
2) Passive selection: Annuity purchases correlate with another factor such as wealth, which in turn correlates with longevity (wealthier individuals live longer)
How do active and passive selection affect annuity markets?
Both selection types distort the annuity market, leading to pricing inefficiencies, and can have similar welfare implications.
How can selection effects exist even in compulsory annuity markets?
1) Choice of pension type
2) Annuitisation timing (e.g. it is possible to delay annuitisation
How do individuals with different mortality expectations self-select into different annuity products?
1) Guarantee annuities: Shorter-lived individuals prefer annuities with 5- or 10-year guarantees postmortem, ensuring heirs receive payments if they die early
2) Backloaded annuities: Longer-lived individuals prefer escalating or inflation-linked annuities since more payments occur in later years
What types of annuity payment profiles were studied?
1) Nominal annuities (fixed payments)
2) Escalating annuities (rising payments over time)
3) Inflation-linked annuities (payments adjust with Retail Price Index)
Why would a backloaded annuity be more appealing to someone with longer life expectancy?
A backloaded annuity is more appealing to those with longer life expectancy because more of the backloaded annuity’s payments occur in later years, making it more valuable to those who expect to live longer.
What would a money’s worth (MW) value of 1 indicate?
A MW of 1 (unity) indicates an actuarially fair annuity, where insurers neither gain nor lose in expectation.
What happens to survival probability when mortality is weighted by amounts rather than lives?
Survival probability is higher when mortality is weighted by amounts rather than by lives, and this effect is more pronounced in the compulsory market than in the voluntary one, suggesting wealth-related selection effects.
Why is money’s worth not a perfect measure of adverse selection?
The assumption of constant administrative costs and profits across products, markets, ages, etc., may not hold, leading to biased estimates of adverse selection.
According to Pashchenko (2013), what alternative explanations exist for low annuitization rates?
Pashchenko (2013) highlighted that bequest motives and minimum withdrawal requirements from retirement accounts could explain low annuitization rates without strong adverse selection effects.
How might adverse selection show up in the compulsory annuity market?
They noted that there was scope for seelction in that you could choose beyween a defined contribution occupational or pension plan.
And in the compulsory market, they have some discretion over the amount they annuitise.
What term structure do they use for interest rates?
They use the zero coupon yield curve of nominal and index lined Treasury securities, and use riskless rates.
If they used risky rates thant the MWs of the various annuity products would be lower than what the calculations suggest.
What is the difference between the two sets of mortality tables that they use?
They use one that is lives weighted (where mortality experience of each annuitant is weighted equally) and then one which is amounts weighted (weighted by amount of annuity purchase)
What difference did they find in survival probability once they weighted mortality by amounts rather than lives?
They found that the survival probabilty is higher
This is likely due to the fact that wealthier individuals (who have higher survival probabilities) purchase larger annuities than less wealthy individuals - more pronounced in the compulsory market,
What is the pattern found regarding MW ratio as age increases?
That the MW values always declines with age
How did they measure the degree of adverse selection and what did they find?
Reported the ratio of the difference in money’s worth for a typical annuitant and typical individual. Calculated of compulsory market relative to the voluntary market.
Found that adverse selection is only half of that in the compulsory marekt versus the voluntary market.
What did they find regarding amounts based mortality tables that aligned with the principle of active selection?
Found that those with lower mortality risk have higher MW as a result, which is consistent with the principle of active selection.
What is the pattern regarding guarantee periods and MW?
When looking to different guarantee periods, the MW increases systematically with the length of the guarantee period
What is the pattern found as it relaties to nominal, real and escalating annuities?
There is a consistent pattern of lower money’s worth values for escalating annuities.
Only caveat - the difference between 5% and real annuties. Would expect 5% have lower MW than real but not backed up by the data.
How does the MW differ between an annuity product with a rising nominal payout stream or inflation index payout stream, versus a level nominal product?
MW for a rising nominal payout stream of an inflation payout stream is lower than for a level nominal product.
