This paper proposes a new price test for evidence of active adverse selection in the insurance market for longevity risks: the annuity market. The test is applied to the exogenous change in taxation of annuity payments following the UK’s 1956 Finance Act using a unique dataset of individual annuity contracts, and provides a natural experiment of whether the fall in annuity prices caused by the tax change induced marginal annuitants with higher mortality into the market after the tax change. We find some evidence to support an adverse selection story that mortalities of the pool of annuitants after the change increased. However, we also find that the story is more complicated because the tax change stimulated the development of annuity products that allowed higher mortality individuals to signal their mortality to annuity providers, creating a separating equilibrium, where previously there had only been a pooling equilibrium.

Keywords: Adverse selection, insurance markets, annuities
JEL codes: G22, D4, D82

Netspar, Network for Studies on Pensions, Aging and Retirement, is een denktank en kennisnetwerk. Netspar is gericht op een goed geïnformeerd pensioendebat.

MEER OVER NETSPAR


Missie en strategie           •           Netwerk           •           Organisatie           •          Podcasts
Board Brief            •            Werkprogramma 2023-2027           •           Onderzoeksagenda

OVER NETSPAR

Onze partners

B20160708_university of groningen
B20160615_pggmgroengrijs_grijswaarden_small
B20220518_BNP Paribas logo_voettekst
B20211201_Cardano_Logo 2021_website
AFM logo 2023 zwart wit
Bekijk al onze partners