July 2021

What's Wrong with Annuity Markets?

Stéphane Verani and Pei Cheng Yu


We show that the supply of life annuities in the U.S. is constrained by interest rate risk. We identify this effect using annuity prices offered by U.S. life insurers from 1989 to 2019 and exogenous variations in contract-level regulatory capital requirements. The cost of interest rate risk management accounts for at least half of the average life annuity markups or eight percentage points. The contribution of interest rate risk to annuity markups sharply increased after the great financial crisis, suggesting new retirees' opportunities to transfer their longevity risk are unlikely to improve in a persistently low interest rate environment.

Accessible materials (.zip)

Keywords: life insurance; annuities; corporate bond market; retirement; interest rate risk

DOI: https://doi.org/10.17016/FEDS.2021.044

PDF: Full Paper

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Last Update: November 12, 2021