Amy Finkelstein’s Deep Dive Into Annuities & Insurance

Companies selling variable annuities that are available with a host of investment choices face the private information problem, Milevksy noted. “It’s about who knows what; but today the companies are learning more. Amy has been very good at measuring this [type of] anti-selection,” he said.

As a Harvard government major, the New York native says she became interested in economics because “it was an exciting way to synthesize history,” a favorite subject of hers in high school. She went on to pursue a master’s degree in economics at Oxford and then a doctoral degree in the subject at MIT.

Early on in her studies, economics led the budding academic to dive deeper into empirical political science. “The more I became involved, the less interested I was in the question of why policies were the way they were and more [interested in] the question of what was the impact of the policies or what the policies should be,” she explained.

She then took classes on social problems in the American economy and found that “rather than just arguing about questions based on ideology, as my friends and I were doing, you could use data to look at [issues like]: Do divorce laws affect divorce rates? It turned out that you could do research on such issues. As someone who was really interested in the world around me, the idea that you could use data to answer these questions rather than just to debate them was extremely exciting and transformative,” she said.

Insurance Interest

Her fascination with insurance markets stems from working for a year as an economist at the Council of Economic Advisers during the Bill Clinton administration. That interest prompted her to select the subject of her Ph.D. dissertation, written as an MIT grad student: market failures in the health insurance and annuity markets.

Concerning annuities, she stresses that “if you have private information about how likely you are to live and how your parents lived, annuities are a better deal for people who are likely to live longer than the insurance company might expect based only on their age and gender, which is what they price them on.”

Finkelstein also has examined the pricing of long-term care insurance and found it to be unfair: Many people were being charged too much; others, too little. There, private information once again came into play. For example, the more likely an individual thought he or she was going to need nursing home care, the more likely this person was to buy long-term care insurance.

However, she found that pricing did not cause the long-term care insurance market’s small size. Instead, one reason was that “the existence of Medicaid as an insurer of last resort for people with very high nursing home costs reduces demand for long-term care insurance. So it seems that there are real market problems and real reasons for government intervention,” Finkelstein said. “But to design a [government] policy [for this] is a lot harder than I had realized — as an academic trying to think how to design one.”

Health Care Work

Another of her influential studies looked at how the introduction of Medicare in 1965 affected demand for health care and the subsequent implications for government policy. She found that in areas of the U.S. where Medicare had a substantial effect on expanding health care coverage, a big increase in health care spending emerged. With insurance provided, people consumed more heath care since the price was lower, an example of the phenomenon researchers call moral hazard.

Managing health care expenses is of course a major issue in retirement; and it is critical for retirees to approach it thoughtfully, Finkelstein says. They should strive not to make “insurance decisions based on: ‘Oh, wow! I had a big expense last year, so I should lower my deductibles this year,’ or ‘I didn’t have any health care costs last year, so maybe I should get rid of my insurance.’ It’s important to think about the risks you face and reduce your exposure to them, not look at what happened to you the previous year,” she explained.

Carefully studying the details of a long-term care policy before purchasing one is smart, too. “Small differences can make for a very big deal. For example, most people buy long-term care insurance when they’re in their early- to mid-60s [expecting they will be] entering a nursing home, which, on average, most people do in their early 80s. If there’s an escalation of benefits that’s linked to inflation, that might look like just a footnote; but it’s extremely important with a policy you’ll get benefits from in 15 years,” she said.

As with the work of past RIIA award winners, Finkelstein’s sophisticated academic research will be integrated into the curriculum for the Association’s Retirement Management Analyst Designation for financial advisors. RIIA’s July conference, which has the theme “Mapping Solutions for the DOL’s Fiduciary Rule and Beyond,” features presentations from experts including Meir Statman, professor of finance at Santa Clara University.

Because Finkelstein’s research is used by the government-policy community, the economist declined to discuss current administration policies. She did hint, though, that the hot topic of Social Security reform could be a future research topic for her.

“How to think about political risk, how you make your long-term care insurance savings decisions when there is not only uncertainty about your mortality and health care costs but political uncertainty about what the nature of social insurance programs may be in the future, is a fascinating topic and a hard problem — but not one that I have anything to say about yet,” she said.

The MIT professor’s principal areas of research are current top-of-mind concerns for the retirement industry, if not most aging Americans, to be sure. But they also are “core economic issues that come up all the time,” she says. “Economics is an extremely powerful and useful discipline for shedding light on important issues.”

Letting her research speak for itself, Finkelstein refrains from advocating for specific government policies or for any industry changes based on evidence she’s uncovered and examined.

“I wouldn’t feel comfortable in that role, but I hope I’m helping influence people’s thinking and discussion. My research is one part of a larger picture,” she said. “Opinion on any given policy will be affected by many things, of which empirical work such as mine is, hopefully, a part.”