The Economics of a Secondary Market for Variable Annuities

Abstract

This article demonstrates that a secondary market for U.S. variable annuity policies may be immediately welfare enhancing to all parties involved: the insurer, the original policyholder, and a third-party investor. Our model reflects relevant market frictions—here, the product’s tax benefits—that produce differing valuation perspectives for the three parties. This allows for policy transfers that benefit all parties simultaneously, including the insurance company, irrespective of the level of control that it exerts over this secondary market. We illustrate our insights first with a theoretical two-period model, followed by an empirically motivated numerical analysis. Our numerical results suggest a best-estimate total welfare gain of 2.6% of the initial investment amount under the optimal secondary market structure.