Question

If adverse selection occurs in the market for annuities purchased by 60 year old females, would we expect to find that the percentage of annuitants who die in their 90s to be greater or less than the percentage of the overall population who die in their 90s?

Answer 1

If adverse selection occurs in the market for annuities purchased by 60 year old females, would we expect to find that the percentage of annuitants who die in their 90s to be greater than the percentage of the overall population who die in their 90s. This is because several studies tell us that people who are retired and have a certain fixed amount of income tend to live longer than those who don't have any fixed source of income. That is why the annuities are priced higher. They account for the adverse selection problem.