Enhanced Annuities: Drivers of and Barriers to Supply and Demand

Enhanced annuities pay higher pensions than standard annuities in case of a reduced life expectancy and are very prominent in the U.K. insurance market but not in other markets. The aim of this paper is to study drivers of and barriers to supply and demand of enhanced annuities as well as potential market implications of their introduction, including implications for the standard immediate and deferred annuity markets, annuitisation rates and the so-called cannibalisation effect, which may arise within the portfolio of standard annuities because of the enhanced annuity offering. The analysis is based on a comprehensive literature review and an empirical survey in the German life insurance market, which is also intended to offer insight for other industrialised countries with a similar situation in regard to the demographic development and an increasing need for private pensions.