Title: THE MARKET FOR RETIREMENT PRODUCTS IN CHILE: A REVIEW
1THE MARKET FOR RETIREMENT PRODUCTS IN CHILE A
REVIEW ()
- Guillermo Martínez Barros Augusto Iglesias Palau
PrimAmérica Consultores October 2003
2Source PrimAmérica Consultores
3Source SAFP-SVS
4(No Transcript)
5PW Initial Pension / Deferred Annuity Pension 1
/1
Return of Pension Funds 7
6Source SAFP
(1) Excluding the first pension payment.
7Source SAFP
(1) Excluding the first pension payment.
8(1) Excluding the first pension payment. (2) Does
not include transitory disability pensions. (3)
Correspond to pensions to mothers of offspring
from a non-marital relationship, and the parents
of the member.
Source SAFP
9Life Insurance Companies
10Source SVS
11Number of Insurance Companiesin the Annuities
Market
Source S.V.S. Annuities Statistics
12Source PrimAmérica Consultores
() Measured on the basis of Premium
13Annuities Market Concentration ()
of Market
Source S.V.S. Annuities Statistics
14Annuities Market Concentration ()
Source S.V.S. Annuities Statistics
15Source PrimAmérica Consultores
16Source SVS
17Profits of Insurance Companies
18ROE ROA of LICOs
19Evolution of the Chilean Annuities Market
20The Evolution of Annuity Sales
US 000s
Source S.V.S. Annuities Statistics
21Annuities Sales Growth Rates ()
Source S.V.S. Annuities Statistics
22Number of Annuity Policies and Average Premium
Source S.V.S. Annuities Statistics
23New Annuities Average Pension
Source S.V.S. Annuities Statistics.
24Capital per Unit of Pension
- The capital per unit of pension is a measure of
the lump-sum savings needed to finance a lifetime
pension of one unit per month. - The most important inputs in determining the
capital required to purchase a unit of pension
are - the interest rate,
- the life expectancy of the person or group of
people that will receive the pensions, and - the expenses the company expects to incur in
meeting the obligations under the policy. - The average ratio of capital per unit of pension
has fluctuated between 150 and 175, averaging
around 160 over the last twelve years.
25Capital per Unit of Pension
Source S.V.S. Annuities Statistics.
26Underwriting Losses
- The minimum technical reserve calculation rules
issued by the Insurance Superintendency
effectively mean that every new policy sold gives
rise to an underwriting loss of around 117 of
premium. - As such, for every US100 received as single
premium from the client, the insurance company is
obliged to set up a technical reserve of US117
the imbalance between assets received (premium)
and liabilities assumed (pensions to pay) is
covered by a reduction in accounting equity, with
this this differential being shown as a technical
loss in the income statement.
27Underwriting Losses as of Premium
( of Premium)
Source F.E.C.U.
28TYPES OF ANNUITYPRODUCTS
29Types of Annuity Products
- There are four types of annuity product
- i) Old Age Pensions
- ii) Early Retirement Pension
- iii) Disability Pensions (total and partial)
- iv) Survivorship Pensions
- Of these four types of annuities, the largest
share corresponds to early retirement, which in
2001 accounted for 74 of all annuity sales
(US962 million), followed by old age pensions
with 15 (US192 million).
30Annuity Sales by Type of Product
US Millions
Source S.V.S. Annuities Statistics
31Annuity Sales by Type of Product (US Millions)
Source S.V.S. Annuities Statistics.
32Composition of Annuity Salesby Type of Product
()
Source S.V.S. Annuities Statistics
33Composition of Annuity Salesby Type of Product
()
Source S.V.S. Annuities Statistics.
34New Annuities Average Pension by Type of Product
(US/month)
US
Source S.V.S. Annuities Statistics
35New Annuities Average Pension by Type of Product
(US/month)
Source S.V.S. Annuities Statistics
36Annuities Average Premium by Type of Product
(MUS/policy)
MUS
Source S.V.S. Annuities Statistics
37Annuities Average Premium by Type of Product
(US/policy)
Source S.V.S. Annuities Statistics
38Capital per Unit of Pension by Type of Product
Source S.V.S. Annuities Statistics
39Capital per Unit of Pension by Type of Product
Source S.V.S. Annuities Statistics
40ANNUITIES DISTRIBUTION AND COMMISSIONS
41Annuities Sales by DistributionChannel in 2002
Source S.V.S.Annuities Statistics.
42Annuities Direct Intermediation Cost( of
Immediate Lump-sum Premium)
( Gross Written Premium)
Source S.V.S. Annuities Statistics
43ANNUITIES INTEREST RATES
44The Evolution of Annuity Rates ()
Source S.V.S. Annuities Statistics.
45The Evolution Annuity Rates by Type of Product
()
Source S.V.S. Annuities Statistics.
46The Evolution of Annuity Rates by Type of
Product ()
Source S.V.S. Annuities Statistics
47Annuity Rates, Commissions and Premium
- At the market level, there seems to be a clear
trade-off between the technical interest rate and
commissions companies that pay higher interest
rates tend to pay lower commissions to brokers
and agents, and viceversa. - On the other hand, there also seems to be a
positive correlation between level of premium and
the interest rate paid on annuities.
48Annuity Rates v/s Commission (December 2001)
Source S.V.S. Annuities Statistics
49Annuity Rates v/s Premium (December 2001)
Source S.V.S. Annuities Statistics (Dic 2002).
50ANNUITIES ADMINISTRATION COST
51Annuities Administration Cost ()
( Technical Reserves)
Source S.V.S. Insurance Yearbook
52Annuities Administration Cost ()
Source S.V.S. Insurance Yearbook
53ANNUITY SPREADS
54Annuities TheoreticalNet Spread Evolution ()
() Includes 5 largest companies.
55Annuities TheoreticalNet Spread Evolution ()
() The commission as percentage of on premium
has been translated to interest rate by dividing
it by 11, the estimated duration of an average
annuity.
()Includes largest Companies. () Average
PRC-20.
56Annuities Actual Net Spread Evolution ()
() Includes 5 largest companies.
57Annuities Actual NetSpread Evolution ()
() The commission as percentage of on premium
has been translated to interest rate by dividing
it by 11, the estimated duration of an average
annuity.
() Includes 5 largest companies.
58INVESTMENTS AND OTHER INFORMATION ABOUT LIFE
INSURANCE COMPANIES
59The Evolution Investments in theLife Insurance
Market
US millions
Source S.V.S. Insurance Yearbook
60Shareholders Equity in theLife Insurance Market
US millions
Source S.V.S. Insurance Yearbook
61Technical Reserves
US millions
Source S.V.S. Insurance Yearbook
62Ratio of Liabilities to Equity in the Life
Insurance Market
N Times Equity
Source S.V.S. Insurance Yearbook.
63Total Sales in Life Insurance Market
US millions
Source S.V.S. Fecus
64Composition of Sales(December 2002)
Source S.V.S. Fecus
65Evolution of Profits in theLife Insurance Market
US millions
Source S.V.S. Fecus
66Evolution of Stock Market (IPSA) ( Change in
Year)
SourceBolsa de Comercio.
67IPSA Evolution ()
Source Bolsa de Comercio
68Identifying the Risks in the Market for
Retirement Products
- Risks for the Retirees
- Longevity risk
69Identifying the Risks in the Market for
Retirement Products
- Risks for the Retirees
- Longevity risk
70Identifying the Risks in the Market for
Retirement Products
- Risks for the Retirees
- Longevity risk
71Identifying the Risks in the Market for
Retirement Products
- Risks for the Retirees
- Return on Investment
72Identifying the Risks in the Market for
Retirement Products
- Risks for the Retirees
- Purchasing Power Risk
73Identifying the Risks in the Market for
Retirement Products
- Risks for the Retirees
- Bequests and Beneficiaries benefits
- Proyección de los retiros programados y herencias
74Identifying the Risks in the Market for
Retirement Products
- Risks for the Retirees
- Bequests and Beneficiaries benefits
75Identifying the Risks in the Market for
Retirement Products
- Risks for the Providers (especially for insurers)
- Longevity
Source INE CELADE. Mortality Tables, 1950 2050
(Interpolation)
76Identifying the Risks in the Market for
Retirement Products
- Risks for the Providers (especially for insurers)
- Longevity
(1) This is an actuarial calculation which
depends on the life expectancy of the family
group and the discount rate applied in the
exercise. An Interest of 5 was used in these
computations for a single man age 54 with the
RV85 Mortality Table.
77Identifying the Risks in the Market for
Retirement Products
- Risks for the Providers (especially for insurers)
- Rate of return on investments
78Identifying the Risks in the Market for
Retirement Products
- Risks for the Providers (especially for insurers)
- Asset / Liability management
79Identifying the Risks in the Market for
Retirement Products
- Risks for the Providers (especially for insurers)
- Market Risk
- ()
80Identifying the Risks in the Market for
Retirement Products
- Risks for the Providers (especially for insurers)
- Concentration Risk
81Identifying the Risks in the Market for
Retirement Products
- Risks for the Providers (especially for insurers)
- Administrative Efficiency
82Identifying the Risks in the Market for
Retirement Products
- Risks for the Government
- Minimum Pension Guarantee
83Identifying the Risks in the Market for
Retirement Products
- Risks for the Government
- Special annuity guarantee
84Identifying the Risks in the Market for
Retirement Products
- Risks for the Government
- Special annuity guarantee
85Identifying the Risks in the Market for
Retirement Products
- Risks for the Government
- Special annuity guarantee
86Identifying the Risks in the Market for
Retirement Products
- Risks for the Government
- Special annuity guarantee
87Coping with the Risks Internal Risk Management
by Providers
- The availability of Financial Instruments for
risk management - Current Diversification of Investment Portfolio
(LICO and AFP)
88Coping with the Risks Internal Risk Management
by Providers
- Risk Management capacity and strategies adopted
by the providers - 1. Term (duration) mismatch in LICOs.
89Coping with Risks Qualitative and Quantitative
Regulations on Insurance
- Solvency and Quantitative Regulation
- Liabilities (actuarial and financial)