The Sluggish and Asymmetric Reaction of Life Annuity Prices to Changes in Interest Rates

The Sluggish and Asymmetric Reaction of Life Annuity Prices to Changes in Interest Rates

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Article ID: iaor20162998
Volume: 83
Issue: 3
Start Page Number: 519
End Page Number: 555
Publication Date: Sep 2016
Journal: Journal of Risk and Insurance
Authors: , ,
Keywords: annuities, insurance, interest rates
Abstract:

Many assume that in the short run, annuity prices promptly and efficiently respond to changes in interest rates. Using a unique database of quotes, we show this is not the case. Prices are less sensitive to changes in rates than expected, and responses are asymmetric. Prices react more rapidly and with greater sensitivity to an increase than to a decrease in rates. The results are robust, but there is a small degree of heterogeneity in the responses of different insurance companies. When rates increase, larger firms are slightly quicker to improve prices. The opposite is true when rates decline. In sum, we show that the microstructure of annuity dynamics is more complicated than (simply) adding mortality credits to bond yields.

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