The demand for enhanced annuities

This paper examines market reaction to the introduction of enhanced annuities in a market for deferred standard annuities. The previous literature shows that individuals can try to avoid risk classification by contracting a standard annuity earlier in their life. This paper offers a new perspective to the timing of the annuity purchase under the assumption that individuals already have an idea about their future risk type when young which becomes clearer over time. It shows that enhanced annuities can crowd out earlier standard annuities completely if the individuals have incomplete knowledge of their future risk type. However, if individuals are sufficiently risk averse and there is a sufficiently high proportion of low risks in the population, both products can remain in the market where lower risk types buy enhanced annuities while the higher risks stick to the early standard annuities. The paper identifies the equilibrium candidate with both annuity types to be Pareto-superior and the unique equilibrium.

► Individuals can try to avoid risk classification by contracting a standard annuity early. ► Contrasting previous work, individuals might have an idea on their future risk type when young. ► We model this with fuzzy private information which clarifies over time. ► With this kind of private information, the existence of enhanced annuities can crowd of standard annuities completely. ► Both products can exist simultaneously with sufficient risk aversion and volatility in premiums.