The costs of annuitising: are retirees fairly charged?
- PDF / 1,686,780 Bytes
- 23 Pages / 439.37 x 666.142 pts Page_size
- 110 Downloads / 154 Views
The costs of annuitising: are retirees fairly charged? Cecilia Dassatti1 · Rodrigo Lluberas2 Received: 6 August 2018 / Accepted: 20 December 2018 © The Geneva Association 2019
Abstract This study analyses the costs associated with annuitisation and provides estimates of what we call the “efficient annuity margin”, which is the margin over the market rate that an efficient insurance company could charge in order to cover its costs. Using data from the financial statements filed by insurance companies to the regulator, we estimate a translog cost function following the stochastic frontier methodology. Our data set consists of quarterly balance sheet information from all of the Uruguayan insurance companies over the period 2005–2015. We find that the average cost inefficiency is 17.8% and that there is substantial heterogeneity across firms. In addition, our results show that the annuity margin which an efficient insurance company could charge in order to cover its administrative costs is 11 basis points over the market long-term interest rate. Our proposed method may allow the identification of the administrative and selection costs of providing annuities. Keywords Annuities · Insurance firms · Annuity margin · Stochastic frontier · Cost efficiency
Introduction A typical retiree faces two main risks when entering the retirement phase: the risk of living longer than expected and hence running out of savings, and the risk of the negative effects of market volatility on the accumulated funds for the pension. An immediate annuity is a product commonly used to cope with these risks. When acquiring an immediate annuity, the retiree is promised that he or she will
* Rodrigo Lluberas [email protected] Cecilia Dassatti [email protected] 1
Banco Central del Uruguay, Montevideo, Uruguay
2
Universidad ORT Uruguay and Banco Central del Uruguay, Montevideo, Uruguay
Vol.:(0123456789)
C. Dassatti, R. Lluberas
receive regular payments from an insurance company for the rest of his or her life in exchange for a one-time premium payment. In particular, one of the sources of financial risk faced by retirees today is the uncertainty about how long they are going to live, i.e., the longevity risk. Insurance companies that offer life annuities pool the resources of annuitants, bearing the costs associated with providing this product such as administrative expenses, wages, commissions to agents, mortality risk1 and adverse selection. The last two sources of costs are due to the fact that annuitants usually have longer life expectancies than the general population, which reduces the insurers’ ability to pool mortality risk. Nonetheless, the adverse selection and mortality risk costs can be significantly reduced under compulsory annuitisation. If the costs of providing annuities are significant, insurance companies may be tempted to charge more than what would be charged for an “actuarially fair’’ annuity. A concept usually used to measure how far an annuity is from an actuarially fair level is the Money’s Worth Ratio (MW
Data Loading...
