THE MARKET FOR RETIREMENT PRODUCTS IN CHILE: A REVIEW

1
THE MARKET FOR RETIREMENT PRODUCTS IN CHILE A
REVIEW ()

• Guillermo Martínez Barros Augusto Iglesias Palau

PrimAmérica Consultores October 2003
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Source PrimAmérica Consultores
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Source SAFP-SVS
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(No Transcript)
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PW Initial Pension / Deferred Annuity Pension 1
/1
Return of Pension Funds 7
6
Source SAFP
(1) Excluding the first pension payment.
7
Source SAFP
(1) Excluding the first pension payment.
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(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
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Life Insurance Companies
10
Source SVS
11
Number of Insurance Companiesin the Annuities
Market
Source S.V.S. Annuities Statistics
12
Source PrimAmérica Consultores
() Measured on the basis of Premium
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Annuities Market Concentration ()
of Market
Source S.V.S. Annuities Statistics
14
Annuities Market Concentration ()
Source S.V.S. Annuities Statistics
15
Source PrimAmérica Consultores
16
Source SVS
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Profits of Insurance Companies
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ROE ROA of LICOs
19
Evolution of the Chilean Annuities Market
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The Evolution of Annuity Sales
US 000s
Source S.V.S. Annuities Statistics
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Annuities Sales Growth Rates ()
Source S.V.S. Annuities Statistics
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Number of Annuity Policies and Average Premium
Source S.V.S. Annuities Statistics
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New Annuities Average Pension
Source S.V.S. Annuities Statistics.
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Capital 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.

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Capital per Unit of Pension
Source S.V.S. Annuities Statistics.
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Underwriting 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.

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Underwriting Losses as of Premium
( of Premium)
Source F.E.C.U.
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TYPES OF ANNUITYPRODUCTS
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Types 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).

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Annuity Sales by Type of Product
US Millions
Source S.V.S. Annuities Statistics
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Annuity Sales by Type of Product (US Millions)
Source S.V.S. Annuities Statistics.
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Composition of Annuity Salesby Type of Product
()

Source S.V.S. Annuities Statistics
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Composition of Annuity Salesby Type of Product
()
Source S.V.S. Annuities Statistics.
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New Annuities Average Pension by Type of Product
(US/month)
US
Source S.V.S. Annuities Statistics
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New Annuities Average Pension by Type of Product
(US/month)
Source S.V.S. Annuities Statistics
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Annuities Average Premium by Type of Product
(MUS/policy)
MUS
Source S.V.S. Annuities Statistics
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Annuities Average Premium by Type of Product
(US/policy)
Source S.V.S. Annuities Statistics
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Capital per Unit of Pension by Type of Product
Source S.V.S. Annuities Statistics
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Capital per Unit of Pension by Type of Product
Source S.V.S. Annuities Statistics
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ANNUITIES DISTRIBUTION AND COMMISSIONS
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Annuities Sales by DistributionChannel in 2002
Source S.V.S.Annuities Statistics.
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Annuities Direct Intermediation Cost( of
Immediate Lump-sum Premium)
( Gross Written Premium)
Source S.V.S. Annuities Statistics
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ANNUITIES INTEREST RATES
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The Evolution of Annuity Rates ()

Source S.V.S. Annuities Statistics.
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The Evolution Annuity Rates by Type of Product
()

Source S.V.S. Annuities Statistics.
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The Evolution of Annuity Rates by Type of
Product ()
Source S.V.S. Annuities Statistics
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Annuity 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.

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Annuity Rates v/s Commission (December 2001)
Source S.V.S. Annuities Statistics
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Annuity Rates v/s Premium (December 2001)
Source S.V.S. Annuities Statistics (Dic 2002).
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ANNUITIES ADMINISTRATION COST
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Annuities Administration Cost ()

( Technical Reserves)
Source S.V.S. Insurance Yearbook
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Annuities Administration Cost ()
Source S.V.S. Insurance Yearbook
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ANNUITY SPREADS
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Annuities TheoreticalNet Spread Evolution ()

() Includes 5 largest companies.
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Annuities 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.
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Annuities Actual Net Spread Evolution ()

() Includes 5 largest companies.
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Annuities 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.
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INVESTMENTS AND OTHER INFORMATION ABOUT LIFE
INSURANCE COMPANIES
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The Evolution Investments in theLife Insurance
Market
US millions
Source S.V.S. Insurance Yearbook
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Shareholders Equity in theLife Insurance Market
US millions
Source S.V.S. Insurance Yearbook
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Technical Reserves
US millions
Source S.V.S. Insurance Yearbook
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Ratio of Liabilities to Equity in the Life
Insurance Market
N Times Equity
Source S.V.S. Insurance Yearbook.
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Total Sales in Life Insurance Market
US millions
Source S.V.S. Fecus
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Composition of Sales(December 2002)
Source S.V.S. Fecus
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Evolution of Profits in theLife Insurance Market
US millions
Source S.V.S. Fecus
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Evolution of Stock Market (IPSA) ( Change in
Year)

SourceBolsa de Comercio.
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IPSA Evolution ()
Source Bolsa de Comercio
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Identifying the Risks in the Market for
Retirement Products

• Risks for the Retirees
• Longevity risk

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Identifying the Risks in the Market for
Retirement Products

• Risks for the Retirees
• Longevity risk

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Identifying the Risks in the Market for
Retirement Products

• Risks for the Retirees
• Longevity risk

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Identifying the Risks in the Market for
Retirement Products

• Risks for the Retirees
• Return on Investment

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Identifying the Risks in the Market for
Retirement Products

• Risks for the Retirees
• Purchasing Power Risk

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Identifying the Risks in the Market for
Retirement Products

• Risks for the Retirees
• Bequests and Beneficiaries benefits
• Proyección de los retiros programados y herencias

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Identifying the Risks in the Market for
Retirement Products

• Risks for the Retirees
• Bequests and Beneficiaries benefits

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Identifying the Risks in the Market for
Retirement Products

• Risks for the Providers (especially for insurers)
• Longevity

Source INE CELADE. Mortality Tables, 1950 2050
(Interpolation)
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Identifying 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.
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Identifying the Risks in the Market for
Retirement Products

• Risks for the Providers (especially for insurers)
• Rate of return on investments

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Identifying the Risks in the Market for
Retirement Products

• Risks for the Providers (especially for insurers)
• Asset / Liability management

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Identifying the Risks in the Market for
Retirement Products

• Risks for the Providers (especially for insurers)
• Market Risk
• ()

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Identifying the Risks in the Market for
Retirement Products

• Risks for the Providers (especially for insurers)
• Concentration Risk

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Identifying the Risks in the Market for
Retirement Products

• Risks for the Providers (especially for insurers)
• Administrative Efficiency

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Identifying the Risks in the Market for
Retirement Products

• Risks for the Government
• Minimum Pension Guarantee

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Identifying the Risks in the Market for
Retirement Products

• Risks for the Government
• Special annuity guarantee

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Identifying the Risks in the Market for
Retirement Products

• Risks for the Government
• Special annuity guarantee

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Identifying the Risks in the Market for
Retirement Products

• Risks for the Government
• Special annuity guarantee

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Identifying the Risks in the Market for
Retirement Products

• Risks for the Government
• Special annuity guarantee

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Coping with the Risks Internal Risk Management
by Providers

• The availability of Financial Instruments for
  risk management
• Current Diversification of Investment Portfolio
  (LICO and AFP)

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Coping with the Risks Internal Risk Management
by Providers

• Risk Management capacity and strategies adopted
  by the providers
• 1. Term (duration) mismatch in LICOs.

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Coping with Risks Qualitative and Quantitative
Regulations on Insurance

• Solvency and Quantitative Regulation
• Liabilities (actuarial and financial)