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Title: On the cost of adverse selection in individual annuity markets: Evidence from Singapore
Authors: Fong, W.M. 
Issue Date: 2002
Citation: Fong, W.M. (2002). On the cost of adverse selection in individual annuity markets: Evidence from Singapore. Journal of Risk and Insurance 69 (2) : 193-207. ScholarBank@NUS Repository.
Abstract: New evidence is presented on the cost of adverse selection in individual annuity markets using Singapore data. The Singapore annuity market is an interesting setting to examine the cost of adverse selection for three reasons. First, unlike many Western countries, the Singapore government provides very limited public financial assistance for retirees. Second, while social security contributions mandated under the Central Provident Fund (CPF) result in a high forced savings rate, a large proportion of CPF savings, are used up for housing. Third, to ensure that retirees have sufficient funds to meet basic needs, individuals who reach age 55 are required to set aside a minimum amount of their CPF savings, which can be withdrawn at age 62. The CPF Board allows various options for investing the minimum sum, but the most attractive option is to purchase an annuity. The institutional setting in Singapore in effect provides insurers with a large captive market for annuities. It is conjectured that this should be reflected in a significantly lower cost of adverse selection for annuities sold in Singapore as compared with other countries. The results herein, using data for CPF-approved insurers, are strongly consistent with this conjecture. On average, money's worth of annuities is higher than annuities sold to a similar age-gender mix in the United States, United Kingdom, and Australia. Adverse selection accounts for less than 13 percent of the cost of longevity insurance compared to 30-50 percent documented in many previous studies. These results suggest that one way to resolve the adverse selection problem is to adopt a universal individual defined contribution pension scheme that mandates or provides strong incentives for retirees to purchase annuities. ©The Journal of Risk and Insurance.
Source Title: Journal of Risk and Insurance
ISSN: 00224367
DOI: 10.1111/1539-6975.00014
Appears in Collections:Staff Publications

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