Abstract

Life insurers charge substantial markups on products that transform retirement wealth into lifetime income. This review provides a framework for organizing evidence on the demand- and supply-side forces determining U.S. annuity markups. The framework decomposes the markup into terms that reflect product market competition, economic balance sheet risks, statutory capital, and adverse selection. The available evidence suggests that balance-sheet and statutory capital costs account for most of the markup. We examine whether existing empirical designs use appropriate discount rates for measuring markups and distinguish balance sheet costs from statutory capital costs. We outline data and research designs that could identify these channels independently.

Joint work with Stéphane Verani (Fed), Pei Cheng Yu (UNSW)