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					ANNUITIES WORKSHOP

                                                                         ANNUITIES IN LATIN AMERICA


                      A NNUITIES IN L ATIN A MERICA
                                     J O N A TH A N C A L L U N D
                                     General Manager
                              Callund y Compañia Ltda, Chile


INTRODUCTION                                         These are the most relevant ones and provide
                                                     a broad range of variations on a similar theme.
I have been asked to talk about my experience        I will also be touching, although only briefly,
in the annuity markets in the Region and in          on the conditions in Colombia and Brazil.
particular four specific discussion points:
                                                     I gave an earlier version of this paper at
- What has been the evolution of the annuity         another World Bank conference on annuities
markets in recent years?                             in Mexico City in 1997. That event has since
                                                     allowed me to follow the development of the
- The pros and cons of obliging members to           Mexican AFORE system and the dynamic
purchase an annuity mandatory?
                                                     annuity market that has come into being there
- What has been the degree of member                 over the last two years.
satisfaction?
                                                     Now for some background on me and my
- How do the systems of annuities compare
                                                     firm. I have been in Chile since 1993 and
among themselves?
                                                     have followed the development of the annuity
                                                     market there from a number of different
This is tall order in an hour, especially given
                                                     angles:
that I am the only one talking about Latin
America and, there is a lot of basic material to
                                                     - In carrying out feasibility studies and
cover before we can get round to addressing
                                                     actuarial work for foreign investors, my firm
these issues.      However, given that the
                                                     has been involved in setting up a number of
presentations yesterday covered many of
                                                     annuity companies.
concepts and in some depth, I will be
spending a good deal of my time explaining           - As employee benefits consultants, we advise
the background to the AFP system in Chile            employers on how best to make use of the
and the practical issues of annuity market           AFP system and assist them in setting up
there. This will assist us in understanding the      pension plans to supplement the mandatory
conditions of the other markets.                     contributions, especially for executives.
                                                     - As financial planning consultants, we
I will then look at each of the other selected
                                                     counsel individuals on the way to save for old
markets, comparing them with Chile, before
                                                     age and how best to arrange for a pension in
moving on to the two policy questions,               the AFP system, whether as programmed
namely whether or not it is a good idea to give
                                                     withdrawal or an annuity.
the pensioner an alternative to the annuity and
what has been the effect of these young
                                                     We have also worked in Argentina and Peru,
systems in terms of benefits to the consumer.        assisting the government in developing the
I would then plan to leave around 10 minutes         regulations, medical commissions and
for questions.
                                                     insurance market conditions for the survivors
                                                     and disability pension systems.
I will be looking at four annuity markets,
namely; Chile, Argentina, Peru and Mexico.



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 This group insurance product is probably the                                million were making regular contributions.
 most important area for the development of an                               This compares with only 530,000 members
 annuity market in the early days of an AFP-                                 (less than 3%) who currently draw pensioners.
 type system, as old age pensions do not                                     Around 80% of these pensioners are in Chile.
 develop until at least 10 years after the system                            According to the same source, the total funds
 has begun. This is because the seniors, let’s                               under management at the end of 1998 were
 say the over 45 year-olds, in the working                                   US$52 billion.
 population, will tend to remain in the pay-as-
 you-go system – there is simply not the time                                According to a recent SOLOMON BROTHERS
 necessary for these individuals to develop the                              study, the total funds in the Region are
 capital sum to purchase an annuity.                                         projected to grow to US$360 billion by the
                                                                             year 2010.
 PENSION REFORMS IN THE REGION
                                                                             This is a considerable amount of money and is
 Excluding Brazil and Venezuela, all the large                               a very good starting point for the development
 countries and many of the smaller ones in                                   of an annuity industry in the Region.
 Latin America have implemented a Chilean-
 style, non-State pension fund system.                                       As we all know, the basic premise of a
                                                                             capitalization system of the type that has now
 Chile started the ball rolling with the launch                              been implemented throughout the sub-
 of the AFP System on May Day, 1981. It                                      continent (and many other parts of the world –
 then took over twelve years for the next                                    most recently in Poland where a new system
 country, Peru, to follow suit. That was in mid                              started only two months ago), is that there are
 1993. Colombia and Argentina followed in                                    two distinct stages:
 1994 and then Uruguay in April 1996. In
 1997, both Bolivia and Mexico initiated their                               Two Stages of a Capitalization System
 own modifications of the system and as
 recently as April last year, El Salvador joined
 the fold.                                                                   - The accumulation period, during which the
                                                                             employees place their State-mandated (and
 Statistics on the Reformed Regional                                         voluntary) savings for old age with an AFP,
 Pension Systems                                                             AFJP, AFAP, AFORE, or what ever the
                                                                             private sector fund manager happens to be
          Table 8: Regional Pension System Data                              called, with a view to them being invested in
                    (December 1998)                                          the capital markets, generating real returns, so
                        (                                 )                  as to create a sufficient funds with which to
  Country           Start Date    Members        Pensioners Funds (US$ m)    retire.
  CHILE                May-81        5,950,694        419,613       31,029
  PERU                 Jun-93        1,965,136         13,842        1,786
                                                                             - And, at that moment the second stage, the
  COLOMBIA             Apr-94        2,702,257          2,787        1,767
                                                                             pay-out period or “decumulation” (as Dimitri
  ARGENTINA             Jul-94       7,067,123         37,813       11,526
                                                                             Vitas referred to it in a recent paper in Chile)
  URUGUAY              Apr-96         506,517             n/a         374    begins. This, then, is primarily where the
  BOLIVIA              May-97         416,267             n/a         276    annuity comes into its own, although, as we
  MEXICO                Jul-97      13,827,674        24,955         5,508   shall see a significant number of annuities will
  EL SALVADOR          Apr-98         569,972             n/a          n/a   be bought before normal retirement age, i.e. in
  TOTAL                           33,005,640       499,010        52,267     the case of disability and death.
Source: PrimAmérica Consultores

                                                                             For obvious reasons, the “new” systems in the
 According to the latest statistics produced by                              Region have all but focused exclusively on
 my friends at PRIMAMÉRICA CONSULTORES, in                                   the accumulation period, i.e. assuring the
 March 1999 these nine systems accounted for                                 efficiency of the fund managers, optimizing
 over 34 million members, of which around 21                                 the return-to-risk function of the investments,


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ensuring     the     correct     collection    of                  Annuities in Argentina
contributions, controlling the commercial                          In Argentina, in March 1999 there were
practices of the agents and fund managers                          42,000 pensioners, of which only half of the
and, in general, minimizing costs. Few of the                      28,100 survivors pensioners were drawing an
systems have matured sufficiently to generate                      annuity – the rest are drawing programmed
any significant concerns over annuities, i.e.                      withdrawals.
the vast majority of members are still active
contributors and there are few pensioners. By                                   Figure 16: Pensions in Argentina
all accounts, then, this is an issue that has yet                                        (March 1999)
to be looked at (and is clearly the prime                                          Old age   Total of 42,051
reason for an event like this conference).                                          19%



   Figure 14: Private Pensions in the Region
                                                                      Disabled
                (March 1999)                                            14%
                                                                                                                  Survivors
                                                                                                                    67%


                 Peru    Mexico   Colombia
   Argentina      3%      6%         1%                            As for the 6,000 disabled pensioners, all of
      8%
                                                                   these are still in the 3-year transition period
                                                                   prior to confirmation of their disability by the
                                                                   MEDICAL COMMISSION.           These members
                                                                   currently receive pensions from the
                                                                   specialized insurance company providing the
                                               Chile
                                               82%
                                                                   group disability and survivors’ pension
                                                                   insurance cover to the AFJP. As regards the
By all accounts, the only AFP-type system                          old age pensioners, there are a few – some
where there are pensioners in any number is                        8,000, but only 50 of these have opted to
Chile.                                                             purchase an annuity, the rest are drawing
                                                                   programmed withdrawals.
               Figure 15: Pensions in Chile
                                                                   Pensions in Mexico
                      (March 1999)
                                                                   In Mexico, after only 24 months, or so, there
                        Total of 446,364       Survivors
                                                                   are 30,000 pensioners in the AFORE system,
                                                 27%
                                                                   all of which are drawing annuities.

                                                                                 Figure 17: Pensions in Mexico
  Old age                                          Disabled                              (March 1999)
   63%                                               10%
                                                                        Total of 29,864
                                                                                             Old age
                                                                                               5%
By March 1999, there were around 450,000                                                                            Survivors
pensioners; 280,000 old-age pensioners,                                                                               44%

113,000 survivors’ pensioners and around
57,000 disability pensioners. Of these, only                         Disabled
                                                                       51%
around 60% - are paid as assured annuities,
while the balance is being drawn down from
the AFP system as programmed withdrawals.                          In addition, there are around 4,000 pensioners
                                                                   under the workers’ compensation system,
This compares                with       the   annuities       in   bringing the total to nearly 34,000. The
Argentina.                                                         distribution between disability and survivor’s
                                                                   pensioners is about half-and-half.




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Pensions in Peru                                              Programmed Withdrawal as an alternative to
A total of 15,200 pensioners in Peru (March                   the annuity.
1999), of which 2,400 were old age pensions.
              Figure 18: Pensions in Peru                     In Chile, in addition to the US$32 billion
                     (March 1999)                             (May 1999) in pension funds managed by the
               Old age
                                                              AFPs, the life insurance companies have
                          Total of 15,166
   Disabled
                16%                                           already amassed over US$10 billion, or a
      5%                                                      third of the AFP funds in technical reserves
                                                              on the books of the 23 annuity companies.

                                             Survivors
                                                              THE CHILEAN ANNUITIES MARKET
                                               79%
                                                              I will now spend around 20 minutes outlining
Most of these (80%) are survivor’s                            some of the basic conditions of the AFP
pensioners. What’s more, there are less than                  system that the affect the structure and
800 cases of disability (after over 5 years!).                dynamics of the annuity market. It will be
The vast majority of these cases are in receipt               seen that many of the same concepts have
of annuities under the special group disability               been adopted in the other countries. This will
and survivors’ pension insurance cover.                       help us when we come to compare the
                                                              conditions and look at the specific issues I
Types of Pensions in the Region                               have been asked to cover.
The fact that there are still so few pensioners
is, in fact, good news, as the development of a               The Pension Methods
sophisticated and solvent annuity market
requires time and considerable preparation.                   The Chilean system provides for disability,
The Chilean experience certainly shows this                   old-age and survivor’s pensions, offering the
and, as with many other facets of the                         member or his surviving dependants’ a choice
movement towards mandatory capitalized                        of three pension methods:
pension savings, Chile can provide other                      - Retiro Programado - Programmed
countries with a number of general lessons.                   Withdrawals – also referred to as Systematic
                                                              Withdrawals in the US or Income Draw-
Figure 19: Types of Pensions in Latin America                 Down in the UK,
               (March 1999)
                                                              - Renta Vitalicia Inmediata - Immediate
                         Total of 536,236                     Annuities,
                                                  Survivors
                                                    33%
                                                              - Renta Vitalicia Diferido con Renta
                                                              Temporal - Deferred Annuities with
 Old age
  54%
                                                              Temporary Withdrawals.
                                            Disabled
                                              13%
                                                              In the Chilean AFP system, the annuity is an
                                                              option.
Returning to the projections of the $360
billion in pension funds by the end of the next               - Programmed Withdrawal, under the
decade, this figure is more an indication of the              programmed withdrawal (PW) method, the
projections of the annuity market, as the vast                funds are retained in the member’s AFP
majority of these savings will, by definition,                account. It is the AFP which assesses the
end up being transferred to annuity                           level pension (in indexed units of account -
companies. Mind you, not all of the funds                     Unidades de Fomento) each year as an
will be converted to an annuity, given                        actuarial function of the member and
considerations of State Minimum Pensions                      dependants’ ages and sexes, such that the fund
and the existence of the option of a


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will be completely drawn down over the
expected remaining life-time. During this        A profit-sharing endorsement was approved
period the fund continues to accrue the full     in 1988, but it was subsequently withdrawn.
returns generated by the AFP (less any
                                                 It is important to note that the annuity option
expenses, if the AFP makes a charge). At any
                                                 may only be taken by those members who are
time, the member, or in the case of his death,
                                                 able to contract an annuity which is greater
his dependants’ may opt for one of the other
                                                 than or equal to 110% of the State guaranteed
two methods.
                                                 minimum old age pension. This accounts for
- Annuity, The immediate annuity is a            a large number of low-income members or
pension method whereby the member agrees         those with a poor contribution record, being
to transfer the balance of his pension savings   obliged to draw a PW.
account as a lump-sum premium to one of the           Table 9: Comparison of Programmed
life insurance companies in return for a life-              Withdrawal with annuity
long guaranteed monthly payment (in this
                                                       Programmed                   Annuity
case indexed in Unidades de Fomento) from
                                                        Withdrawal
the moment of signing the contract and the
                                                  Member may change           Irrevocable contract.
subsequent payment of the survivors’              AFP or switch to an
pensions, if applicable.       This insurance     annuity.
contract is irrevocable and is based on a         Pensions              are   Pension is fixed at
standard policy conditions, approved by the       recalculated annually.      the outset.
SUPERINTENDENT OF INSURANCE.                      The rate or return is not   The rate of return is
                                                  guaranteed.                 guaranteed.
- Deferred Annuity, the deferred annuity          No longevity insurance.     Life-long payment of
with temporary withdrawal method entails                                      pensions.
member contracting to receive a guaranteed        Managed by an AFP.          Managed        by  an
annuity from a date in the future, as                                         insurance company.
determined in the policy and retaining            Gives rise to inheritance   No        rights   to
sufficient funds in his pension savings           on death                    inheritance.
account to receive a temporary income from        Pensions tend to fall in    Pensions are constant
the AFP to cover the period from the date of      time.                       in real terms.
opting for this method and the date on which
annuity payments begin. There one important      In addition to the above conditions, the PW in
of condition to this hybrid arrangement - the    Chile differs from the annuity in the following
deferred annuity may not be greater than 50%,    aspects:
nor less than 100% of the first temporary
income payment.                                  - In determining the value of the PW, the AFP
                                                 makes no consideration for the cost of the
In addition to the basic conditions, the         contingent funeral grant (UF15 or around
SUPERINTENDENCY has since approved a             US$450), payable on the member's death.
number of annuity riders:                        - The rate of interest applied is based in part
                                                 (80%) on the returns made by the AFPs on the
- A guaranteed minimum period of payment,        pension funds over the last 10 years and the
say 5 or 10 years,                               average annuity rate in the previous calendar
- Repayment of the initial capital – know as     year (20%) – the rate used this year is around
the “Refund” option in the US, and               6% p.a. This compares with the prevailing
                                                 market annuity rates of around 5% p.a.
- the possibility of improving the contingent
survivor’s pensions above the legal 60% up to    - No consideration is given to expense
a maximum of 100% of the policyholder’s          margins, e.g. administration costs, brokers’
pension.                                         commissions and profit margins – these



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currently amount to around 1.5% in the            balance. The annuity rates will also work
annuity market.                                   against him as times goes by, i.e. the
                                                  “Mortality Drag” to which David Blake
Furthermore, other than the technical aspects,
                                                  referred yesterday.
the convenience of the PW include:
                                                  Early Retirement and the Bonos de
- The attraction of earning a better return in
                                                  Reconocimiento
the short term on the balance of the individual
account than that offered by the life office in   These are two issues in Chile, which are not
the long term – the unit value of the pension     so relevant in the other markets.
funds has risen by over 10% in real terms so
far this year.                                    Early retirement in the Chilean annuity
                                                  market is of great importance.      These
- The attraction of retaining control of the      annuities have come to represent over two
balance of the member's account, in the case      thirds of all annuities sold.
of early death - the balance up to UF4,000
(around US$120,000) is tax free when              Annuity Sales by Type of Pensioner
transferred as part of the member's estate.       The possibility of retiring before the “legal”
- The attraction of not having to draw down       retirement age is a legal and financial quirk.
the full amount of the pension, something         A male member may retire before age 65 if
which is not possible with an annuity. This       the balance in his AFP account is sufficient to
benefit offers considerable tax advantages to     purchase an annuity equal to 50% of his
members with alternative sources of income,       average wage over the previous ten years.
permitting the accumulation of tax sheltered
capital gains until a pension is drawn, or        What’s more, if the balance is sufficient to
leaving the balance to be paid over to the        purchase an annuity of more that 70% of the
member's estate.                                  average wage, then the law allows the
                                                  member to draw down the balance as a lump
- The potential of increasing the level of        sum (Excedente de Libre Disposición). An
pension due to a change in the family group.      added attraction of this is that it is virtually
For example, premature death of the spouse or     tax-free!
the member himself will inevitably lead to a
higher pension for the survivor than any          With this, the early retirement option and the
offered an annuity contract.                      "Libre Diposicion" rule provide the member
                                                  with a strong incentive to retire as soon as
In summary, the PW is a very competitive          possible (and, most of the time, without
product when compared with the annuity.           giving up his job) and so to opt for an early
However, it involves the member retaining         retirement annuity – a second source of
both the longevity risk and the investment        income.
risk, whereas with the annuity contract both of
these risks are ceded to an insurance             Another important structural aspect of the
company.                                          Chilean system is the existence of the Bono
                                                  de Reconocimiento and the possibility for the
This means that the AFPs, in Chile at least,      member to endorse the bond and sell it in the
are seen as competitors of the insurance          secondary market.
companies.
                                                  The "Bono" represents the periods of
Although at the outset, for a healthy retired     contributions registered in the "old system" by
member, the PW may well probably be the           those employees who switched to the AFP
best option, the big question is when should      System. The Bono is nominative, and is held
the member switch to annuity? The longer he       by the AFP as part of the member's individual
leaves the decision the smaller will be his       account. Its value is expressed in pesos at the



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date the member joined the AFP System, and        Disability Pensions
it accrues a real interest of 4% p.a. The Bono    In Chile a member is entitled to a disability
and the interest accrued is payable the day the   pension if, after being evaluated by a
member reaches the normal retirement age, or      specialized MEDICAL COMMISSION, his is
on death or being declared disabled, and it is    found to have suffered a permanent loss of
then paid into the Cuenta de Capitalización       more than 50% (partial disability) or 2/3rds
Individual.                                       (total disability) in working capacity.

By trading the Bono in, the member can            The approval process is done in two stages,
release a large part (still over 60% in most      i.e. all initial assessments are subject to a
cases) of his retirement savings to funds the     review after 3 years.
cost of the pension. Without this possibility,
early retirement would be virtually               The disability benefit is assessed as 50%
impossible.                                       (partial) and 70% (total) of average pay over
                                                  the previous 10 years.
Recent calculations show that the Bonos still
to be paid by the government will add as          During the first 3 years, the company that
much as US$12 billion to future retirement        underwrote the group D&D policy with the
funding.                                          AFP at the time of the claim pays the pension,
                                                  without touching the member’s balance with
The Chilean annuity market has benefited          the AFP (or his Bono de Reconocimiento).
significantly from this particular system for
funding the government obligation. Such a            Figure 20: Chile - Annuity Sales by Type
situation does not exist under the Argentine                     (US$ Millions)
and Mexican models. Even in Peru, where              1000
                                                      900
there are Bonos, the values are considerably          800

smaller and they are not expected to have             700
                                                      600                                                   Early Retirement
anything like the effect they have had, and           500
                                                      400
                                                                                                            Old Age
                                                                                                            Survivorship
will continue to have, in Chile.                      300                                                   Disability
                                                      200
                                                      100

Death & Disability Cover (The Group
                                                         0
                                                         1991         1992          1993      1994   1995      1996        1997

D&D Policy)
                                                    Source: S.V.S. Annuities Statistics
The system of payment of disability and
survivor’s pensions is complex. However, it       At the end of the 3-year period, assuming the
is important, as it is one of the principle       Medical Commission confirms that the
sources of potential annuities in all the         member permanently disabled, then the same
systems under review. The conditions of the       Company pays the Aporte Adicional to the
other three systems are, by and large,            member’s AFP account.
modification of the Chilean scheme.
                                                  This Aporte Adicional is equal to the
The D&D covers are provided under a special       difference between:
group insurance contract, taken out by the
AFP to provide a defined benefit as, a            - Capital Necesario - the technical fund
percentage of average pay, to a member            required to finance the member's disability
suffering from a disability or to his             pension and potential survivors' pensions for
dependants in the case of death before the        his beneficiaries, based on the regulated
normal retirement age (Normal retirement in       mortality tables and a long-term rate or
Chile is taken to be 65 for men and 60 for        interest, and
women).




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- The accumulated balance (including the          beneficiaries of an irrevocable insurance
Bono de Reconocimiento) in the member’s           contract that is underwritten by a registered
AFP account.                                      life insurance company in Chile.
At this moment, i.e. after 3 years, the member    Number of annuities policies Sold
is free to opt between one of the three Pension
                                                  Insurance companies in Chile are divided into
Methods and may elect to purchase an annuity
                                                  life and non-life companies. However, the
with the new (topped-up) balance in his AFP
                                                  life insurance companies need not be
account.
                                                  specialised in annuities, i.e. most tend to sell
Survivor’s Pensions                               other traditional individual and group
                                                  products.
On death, the member's dependants have a
right to survivors’ pensions.    These are           Figure 21: Chile: Number of Policies Sold
determined as a percentage of the member’s
average pay:                                                                                                                 23,082
                                                                                                                                      24,750

                                                                                                                    21,666                     20,628
- 42% for a widow without children.                                                                        18,754
                                                                                                  16,076
                                                                                         14,520
- 35% for a widow while any children draw a                                   11,813

pension.                                                              8,619

                                                            4,498
- 10.5% for each child to age 18 or 24, if in       2,674


full-time education.                                1988    1989      1990     1991       1992    1993     1994     1995     1996     1997     1998

                                                   Source: S.V.S. Annuities Statistics
The amount of the Capital Necesario is
dependent on the actuarial present value of the   The benefit of this contract is the life-long
contingent flow of the survivors’ pensions and    receipt of indexed pension, denominated in
the company then pays the Aporte Adicional.       Unidades de Fomento (UF), which is a legally
                                                  recognized unit of account, the value of which
In both cases, the discount rate used in          is adjusted daily in line with variations in
calculating of the Capìtal Necesario is the       consumer price inflation (CPI). The pension
average market interest rate used by life         is payable monthly in advance.
insurance companies for AFP Annuities in the
calendar quarter immediately prior to quarter     The premium for this contract is a lump-sum,
in which the claim occurred.                      comprising the balance of the member’s
The mortality tables have been defined by the     account in the AFP, together with the cash
SUPERINTENDENCY, based loosely on Chilean         value of the Bono de Reconocimiento. This
experience:                                       sum is paid at the start of the contract.
- MI85 (disabled mortality)
- B85 (beneficiaries’ mortality).                 Chile – Annuity Premiums
                                                  The price of this insurance policy is expressed
The Annuity Product                               as a capital per monthly unit pension, for
                                                  example, 165 units of capital per unit of
Having looked at the basic conditions that        pension, which is the average conversion rate
give rise to the benefits under the mandatory     at present and which is determined freely in
pension system in Chile, we should now look       the market.
at the conditions of the annuity as a financial
product. The market data used in this sections
is taken from a recent study prepared by
Consorcio Nacional de Seguros Vida.

Under an AFP annuity policy, the AFP
member, or his surviving dependants, are the


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           Figure 22: Chile - Annuity Sales                                                   It is the last of these requirements, which
                    (US$ millions)                                                            creates the significant capital "strains" found
                                                                              1,213
                                                                      1,125           1,074
                                                                                              in the annuity business in Chile.
                                                               951
                                                         849
                                                 734                                          In the early years of the annuity business
                                          647
                                578
                                                                                              (prior to 1988), there were few competitors in
                        383
                236
                                                                                              the market and all annuities were written
        129                                                                                   using the maximum technical interest rate of
                                                                                              3% p.a. real.        Consequently, investment
       1988    1989     1990    1991      1992   1993   1994   1995   1996    1997    1998
                                                                                              spreads were very large (4% or more). Asset
    Source: S.V.S. Annuities Statistics
                                                                                              selection, as a result, was concentrated in
                                                                                              bonds and the capital strain was not a real
The purchase of an annuity can be made                                                        concern.        In 1988, the INSURANCE
directly by the member or with the assistance                                                 SUPERINTENDENCY introduced new technical
of independent brokers or company agents,                                                     reserve regulations (Regulaciones de Calce)
giving a right to a commission, the amount of                                                 aimed to encourage annuity companies to
which is stated in the policy document –                                                      optimize the matching of their asset and
average commissions are currently over 5%.                                                    liability flows, by requiring higher risk capital
All pension payments are made directly by the                                                 commitments when this did not.
insurance company, i.e. the AFP has no
further dealings with the members once his                                                    The regulations allow a company to set up
balance is transferred to the insurance                                                       80% of its technical reserves using the market
company.                                                                                      rate, in so far as the term of the assets and
                                                                                              liabilities are matched. The balance of 20%
The Technical Reserves for Annuities
                                                                                              of the reserves must, under all circumstances
The investment of a lump-sum premium                                                          be valued at a conservative rate of 3% p.a. To
received on the sale of an annuity is directly                                                do this, the regulations oblige companies to
affected by the regulations issued by the                                                     split all liability and asset flows into 10
Insurance Superintendent (SVS).                                                               periods ranging from 0 to 24 months (Range
                                                                                              1) to 29 years and over (Range 10).
These regulations are designed to accomplish
the following risk management functions:                                                      In practice, most annuity companies will be
                                                                                              ale to arrange for perfect matching up to 15 or
- Avoid excess exposure to any one asset class                                                16 years and some of the larger more
(for example, over exposure to mutual                                                         established companies may do as well as 18
mortgage units).                                                                              years.     However, given the structure of
                                                                                              investments available in Chile, none will be
- Avoid excess concentrations within any                                                      covered for period beyond 21 years, so
single     asset   class     (for    example,                                                 creating a large degree of reinvestment risk
disproportionate holding in bonds issued by a                                                 and obliging the companies to use value the
particular company).                                                                          reserves conservatively and well below
- Eliminate certain classes of asset, which, due                                              market rates.
to the nature of annuity liabilities, do not
provide similar cash flows or principal                                                       In practice, and despite the lack of suitable
protection features (for example, equities).                                                  long-term investment instruments, the
                                                                                              matching has permitted companies to
- Ensure proper matching by maturity and                                                      establish reserves at rates closer to 4.5% p.a.
cash flows of liabilities generated with                                                      real, allowing the companies to offer higher
selected assets.                                                                              pensions. However, with commercial interest
                                                                                              rates used for pricing annuities at over 5%



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p.a., there are still significant capital           - The same can be said for those members
requirements. As a rule, a difference of 1% in      who are unwell on retirement, i.e. whose own
the between the commercial and matching             projection of their life expectancy is reduced.
rate will signify around 12% in capital cost in     These members are likely to opt to stay with a
writing a new policy.                               programmed withdrawal, so taking this group
                                                    out of the risk pool. In this case, without
Following these changes and with the arrival        these “good risks”, the average longevity of a
of more and more competitors in the annuity         life offices portfolio will tend to be higher
market, the financial spread has been               than that projected by the population table.
progressively squeezed, falling from 2.6% in
1990 to 0.9% in 1997.                               This anti-selection will inevitably be a factor
                                                    in the initial stages of any system. However,
Depending on the average term of the pension        it is understood that the risk of anti selection
liabilities, the capital strain of the annuity      in a portfolio of annuitants reduces over time.
business currently ranges between 4.5% and
10% of the single premium income, before            Over the last few year, the Chilean Insurance
payment of commissions and expenses.                Association         and      the      Insurance
                                                    Superintendency have been working to
Mortality Tables                                    develop a new table based on the 18 years’
The mortality tables used for all pension           claims experience of the AFP system. The
calculations in the AFP system are jointly          new table - RV98 is expected to be introduced
regulated by the Superintendencies of               in the coming months. It is important to note
Insurance and AFPs. As such, these are              that, this table will be applied to all new
applied both in the determination by the AFP        contracts, i.e. it is not expected to affect the
of the Aporte Adicional in the case of              value of the reserves for the existing portfolio
disability or survivors’ pensions as well as by     of annuitants.
life insurance company in rating and
establishing the minimum technical reserves         What is more, the next project is the
for the annuities.                                  development of a table form rating the
                                                    programmed withdrawals – work on this is
To-date all the tables have been non-selective,     already well under way. The motivation for
i.e. they are based on national statistics,         creating such a new table is to ensure that
without any specific sector adjustments.            these calculations are done more precisely, as
However, their application in the AFP system        they directly affect the cost of the State in
is selective, as only a part of the population is   providing the guaranteed Minimum Pensions.
represented under the AFP system.                   Commercialisation of Annuities

The application of these tables in determining      In traditional life insurance, products are
the minimum reserves for all annuities              focused on protection and/or replacement of
involves a potentially high degree of anti-         income streams. In practice, few consumers
selection;                                          of these products seek a company directly to
                                                    provide these types of cover, hence the
- As indicated before, the better educated and      saying, that “insurance is sold, not bought”.
higher socio-economic groups will tend to           With this, insurance companies have tended to
consider the PW option more than the lower          develop a range of different distribution
paid retiring members. In this case, the            channels through which to contact the public
mortality of the lower socio-economic groups,       and convince them of the need for such
due to their access to health care facilities,      protection. Despite the cost, the majority of
work patterns and diet, will tend to be higher      companies involved in these lines of business
than the 'average' projected in the table.          have developed a sales force of agents to
                                                    place these products, given that this has


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proven to be the most effective means of                                                        The commissions have increased considerably
distribution.                                                                                   over the last few years, from around 1.5% of
                                                                                                gross premium in 1988 to well over 5% today.
 Figure 23: Chile - Annuity Interest Rates
     (Guaranteed Real Annual Returns)                                                           Brokers Commissions
                                                                                                This does not reflect a change in the services
                                                                                       5.56%
                                                                                                provided, but the demand from the pensioner
                                                                                                to get hold of a cash sum on retirement and, in
             5.12%         5.16%
                                                                                                effect, commute part of pension.
                                                                5.09%
    5.01%
                                                                          5.01%
                                                                                                The system does not allow the member to take
                                                 4.83%
                                         4.76%
                                                                                                part of the balance as a lump sum (unless the
                                                                                                pension exceeds 70% of salary). This being
 1991         1992          1993         1994      1995         1996      1997         1998
                                                                                                the case, the broker or agent is encourage to
 Source: S.V.S. Annuities Statistics.
                                                                                                pay part of the commission over the to
In the annuities business, however, the                                                         pensioner as part of the “deal”.
situation is significantly different.     On
reaching retirement age or being declared                                                       On the other hand, the best indicator of the
disabled, the potential annuitant is actively                                                   level of pensions is the guaranteed interest
encouraged to look for an insurer and, given                                                    rate offered at any one moment.
the complexity of the market, most of them                                                      As we heard yesterday about the UK market
elect to use a broker or consultant to assist                                                   and low rats, the Chilean situation is quite the
them in selecting the best company. The use                                                     reverse and despite the degree of reinvestment
of direct sales forces in the Chilean annuity                                                   risk, average rates have consistently been in
markets is not common practice, although                                                        excess of 4.5% p.a. real, rising to 5.7% at the
some of the larger companies do have them.                                                      end of 1998.
The use of independent brokers is further
enhanced in Chile, where the regulations                                                        Chile – Annuity Interest Rates
oblige the annuitant to present quotations                                                      These rates are guaranteed for an average
from at least three different companies.                                                        term of over 15 years
The principle elements determining the sale of                                                  The Chilean Annuity Market
an annuity via the brokers in Chile are the
level of commissions and the amount of the                                                      Overall, the life insurance market in Chile has
pension offered. Other factors, such as                                                         grown consistently since the beginning of the
company size, reputation, solvency, service                                                     1980's, reaching a total premium of US$250
and national origin are of considerably less                                                    million by 1988. Since then, the market has
importance.                                                                                     expanded exponentially, largely driven by the
                                                                                                sale of early retirement annuities, which has
     Figure 24: Chile - Brokers Commissions                                                     accounted for over 70% of all annuity sales in
          (% Gross Written Premium)
                                                                                                the last five years. In 1998, the total life
                                                                                                insurance market premium was US$1.6
                                                                                5.3%     5.5%
                                                                                                billion, of which AFP annuities accounted for
                                                                        5.0%
                                                        4.3%
                                                               4.9%                             64% or US$1.1 billion, in new business.
                                                 3.9%
                                          3.6%
                                 3.4%
                        2.9%
                                                                                                In terms of assets under management, Chilean
          2.3%
             1.6%
                                                                                                annuity companies’ reserves have risen from
                                                                                                US$1.5 billion in 1988 to US$7.7 billion in
                                                                                                December 1998. These are projected to
     1988       1989     1990     1991    1992   1993    1994    1995    1996   1997    1998    increase at rates well in excess of 10% p.a.,
        Source : S.V.S. Annuities Statistics                                                    rising to US$37 billion by the year 2010.




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The number of companies participating in the      - Those deriving from the special private
annuity market has increased from 9 in 1988       system of Seguros de Retiro, which are made
to 23 at the end of 1998. Similarly, the          up of individual and group assured pension
volume of premium has increased by an             plans, and
average of 40% p.a. over the period, despite
                                                  - Those deriving from the AFJP system.
having fallen for the first time last year. The
heightened competition shows up in the fact
                                                  The former was an early attempt to resolve
that the largest five companies now represent
                                                  the social security crisis relying almost
a little over 40% of the market, compared
                                                  entirely on private initiative and tax incentives
with 98.5% in 1988.
                                                  to create supplementary voluntary savings.
                                                  The latter, the AFJP system was introduced in
The expected number of potential annuitants
                                                  July 1994 and is closely based on the Chilean
has been projected using demographic data of
                                                  model, although with some key differences.
members in the AFP system, and recent early
retirement patterns.
                                                  The Sistema de Seguros de Retiro
                                                  The Seguros de Retiro came into being in
The projected flow of annuitants over the         April 1987, with Superintendency Resolution
period of is as follows:                          19.106, which authorized the creation of
                                                  companies especially for this new line of
   Table 10: Projected Flow of Annuitants
                                                  business - Compañías de Seguros de Retiro.
        Year    Number of Annuities               Given the lack any alternative system of long-
        1995             22,000 p.a.              term saving at the time (i.e. there was no way
        2000             25,000 p.a.              to supplement the State pay-as-you-go
        2005             36,000 p.a.
                                                  system), the new system developed rapidly
        2010             49,000 p.a.
                                                  and there were over 40 providers by the end
On the other hand, the projected annual           of the first year.
premium flows are anticipated to grow as
                                                  One of the main attractions of the new system
follows:
                                                  was the tax benefit accruing to the premiums
 Table 11: Projected Annual Premium Flows         paid to these special insurance companies.
        Year            Number of                 Although this benefit was generous at the
                         Annuities                outset, it has been held at its current level of
        1995           US$1 billion               A$1,892 for many years now, making it now
        2000          US$1.9 billion              relatively insignificant for most employees in
        2005          US$3.3 billion              the middle and high income bracket.
        2010          US$4.9 billion              Despite the enthusiastic start, the economic
                                                  and financial conditions towards the end of
Having looked at Chile in some detail, we
                                                  the 80’s and the beginning of the 90’s made
now have model with which to compare the
                                                  life virtually impossible in the financial sector
conditions in the other three annuity markets,
                                                  and, following a spate of M&A activity, by
namely: Argentina, Mexico and Peru.
                                                  1992 there were only 26 companies in this
ANNUITIES IN ARGENTINA                            market. However, from day one, La Estrella,
                                                  the largest Compañía de Retiro, has
Argentina is probably the most sophisticated      maintained its lead in this market and as at
of all four markets and differs from the others
                                                  December 1998 still had around half of all the
in having had a form of private sector pension    policies and the mathematical reserves. There
provision prior to their social security reform   are now 30 companies in the sector and the
in July 1994. As such, there are two potential
                                                  second largest is Siembra Retiro with a further
sources of annuities:                             33% of the market.




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The Seguros de Retiro are better understood       However, the Renta Vitalicia and Retiro
as deferred annuities in the Continental          Programado methods do. They also have a
European sense, where, for the payment of a       third option, the Retiro Fraccionado, which is
regular (normally monthly) throughout the         obligatory for any member whose fund is
period of the contract, the policy holder         insufficient to opt for one of the other
acquires a right to a portion of a future         methods, i.e. the member is allowed to draw
pension, as of a date determined at the time      down a fixed amount of around $115 until the
the contract is drawn up. The conditions of       balance is used up.
the contract, in terms of the unit premium for
                                                  Types of Pension
the future pension are freely determined by
the parties, considering the individual’s age     - The Retiro Fraccionado is far and away the
and sex, the type of annuity conditions and the   most common method for drawing and old
age after which the pension is to be paid.        age pension, with over 8,000 cases by March
                                                  1999. This compares with 50 cases of old age
This market can be divided into individual        annuities.
and group contracts. The former is effectively    - As regards disability pensions, the vast
a competitor for voluntary savings to the         majority of the 5,800 cases are still in the
AFJP system, whereas the latter is the most       transitory period, awaiting confirmation of
tax-effective and flexible vehicle for            their permanent disability status. As such the
“traditional” corporate supplementary pension     pensions are being paid by the specialist
plans.                                            insurance companies that can only underwrite
                                                  the group disability and survivors’ pension
As at December 1998 there were over 80,000        insurance, the COMPAÑÍAS DE SEGUROS DE
individual and 900,000 group policies in          VIDA PREVISIONAL. It is these single line
force, representing over US$1 billion in          companies, and there are 18 of them
mathematical reserves (This compares with         responsible for paying the equivalent of the
the US$11 billion held in the AFJP system).       Aportes Adicionales to the member’s account.
Despite an initial slow-down in the market        During the 3 year transition period, these
following the introduction of the AFJP            companies also pay the temporary pensions to
system, the rate of growth of new contracts       the members declared disabled under a 1st
and premiums is now strong again with             Ruling of the Medical Commission.
increases of 13% and 25% respectively in          - Finally, there were 28,000 survivors’
1998.                                             pensions in payment in March 1999. Of
                                                  these, nearly 15,000 had opted for an annuity.
Given that this system has been in operation      The average lump sum premium of these
for over 10 years, there is now a growing         contacts is in the order of $37,000. The top
stream of annuities. However, the numbers         five providers of survivors’ annuities
are still very small. In 1998, 1,189 new          represent over 70% of the market premium.
annuity policies were sold, bringing the total
number of policies in force to 5,639, of which    Annuity Policy Conditions
only 83 are individual policies.                  The conditions of the annuity policy differ
                                                  from those of the Chilean counterpart. In
AFJP Annuities                                    Argentina, the member is free to contract the
                                                  annuity in A$ pesos or US$ dollars (which is
The conditions of the AFJP system and the
                                                  now also the case in Peru).
emerging annuity market are similar to those
found in Chile and Peru, in the sense that at
                                                  As price indexation is illegal in Argentina,
retirement, whether due to disability, death or
                                                  since the passing of the Ley de
old age, there are different pension methods.
                                                  Convertabilidad, pensions may only be held
The Chilean option of a deferred annuity with
                                                  in nominal (A$ or US$) terms. This problem
temporary withdrawal does not exist.



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is overcome by the use of profit-sharing            The Pension Methods
clauses.                                            As in all the cases before, the pension law
The regulatory maximum technical interest           allows the member to opt between an annuity
rate is 4% p.a. real. The only way that a           or a PW on reaching normal retirement age.
pensioner can increase his pension is by
participating in the returns in excess of this      In the case of disability and survivors’
4% rate. The level of profit sharing is written     pensions, however, the law obliges the
into the policy and normally means the issue        member or his dependants to draw an annuity,
of a supplementary policy, guaranteeing the         i.e. the PW is then not an option.
additional life-long pension, when the annual
returns exceed the prescribed level.                Recognition of Contributions to the Old
                                                    Pay-as you-go System
It is clear, therefore, that the Argentine          The Mexican system for recognizing
reserving methodology does not consider the         contributions under the prior social security
possibility of a higher discount rate in relation   system differs from all the other systems in
to the degree of matching (calce) between the       the region. The State does not recognize any
asset and liability flows, which is the basis of    amount, such as the Bono de Reconocimiento
competition in the Chilean annuity market.          in Chile and Peru. Nor does it guarantee a
Another important difference is in the tables       basic pension in respect of these contributions
used in assessing the annuity. In Argentina         (as is the case in Argentina). However, it
there is no single table for assessing annuity      goes considerably further. In July 1997 all
rates and the corresponding reserves. These         employees were obliged to switch to the new
are proposed by the annuity company actuary         system. As compensation for this, the State
and then presented to the Superintendency for       now treats the rights to the pensions under the
approval as part of the technical basis of the      “old” system as an "acquired right". In this
particular policy. In practice, however, given      way, if an employee finds that the pension
the significant risks involved, the actuaries in    under the new system is inferior to the
the market have all tended to opt for one of        pension he would have received, then the
two US tables (GAM 70 or GAM 90),                   State guarantees the original pension benefit
depending on the type of annuity.                   in return for the balance in the member’s
                                                    AFORE account (but not including the SAR
With this, the basis of competition among the       account). Otherwise, member is left to retire
annuity companies is in the levels of profit        with the funds in the AFORE account and
participation offered to the client. This is        without any further State guarantees.
good news for the insurer, as, by using a
lower discount rate, the company reduces its        This is the reason why there are likely to be
reinvestment risk, sharing the returns with the     very few old age annuitants in the
annuitant. In practice, it is normal for            forthcoming years. All these members will
companies to share up to 80% of the                 effectively cash-in their AFORE account and
investment spread.                                  receive the original pension directly from the
                                                    State.
ANNUITIES IN MEXICO
                                                    D&D Insurance
Despite being the last of the countries to
                                                    Unlike in the other three systems, in Mexico
implement an AFP-type arrangement, it is
quite likely that the Mexican annuity market        the insurance market does not underwrite the
will soon outstrip all the rest, both in number     risk and cost of disability and survivors’
                                                    pension claims. This responsibility is retained
of policies and volume of investments.
                                                    by the State, and it is the Instituto Mexicano
                                                    de Seguridad Social (IMSS) that pays the
                                                    equivalent of the Aportes Adicionales –



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                                                                       ANNUITIES IN LATIN AMERICA


known as the Monto Constitutivo. This is           - Monthly inflation indexation - the law
financed by a flat contribution of 2.5% of         provides for an adjustment in February each
salaries, collected by the IMSS.                   year.
                                                   - Life insurance.
On presentation of a disability or death claim,
the IMSS pays a lump sum into the member’s         - Accidental death insurance,
account sufficient to “top-up” the balance to
                                                   - Personal accident cover (including medical
equate with the Monto Constitutivo. This
                                                   expenses),
calculation is assessed using specially
constructed mortality tables and a real            - Funeral expenses cover for the member.
technical interest rate of 3.5% p.a. The           - A predetermined structure of life-long
calculation also considering a one-time            increases pension payments.
allowance of 3.5% for expenses.
                                                   - Family support
With this, the member or his dependants are        - Educational support
obliged to purchase an annuity equal to the
disability or survivors’ pensions defined in the   These and other additional benefits are
law.                                               permitted by the CNSF on condition that they
                                                   are fully financed by the insurer and that the
13 companies have been approved to operate         term of payment is the same as the annuity,
in this annuity market and a 14th is in process    i.e. life-long.
of being approved by the Comisión Nacional
de Seguros y Finanzas (CNSF).                      The effect of these benefits is to ensure a high
                                                   degree of consumer satisfaction, since they
The annuity market has only been in operation
                                                   invariably receive a better deal than under the
for 24 months. Given the structure of the
                                                   law.
system, there are two types of annuities –
those arising as a result of disabilities and      As at the end of 1998, the technical cost of the
survivor’s pensions under the AFORE system         additional benefits in the market was assessed
and those deriving from accidents at work.         at around 4.4% of gross written premiums.

As at March 1999 there were around 34,000          Investments and the Technical Basis of
policies in force, of which 30,000 were            the Policy
AFORE pensioners and the balance of 4,000          As of this month (June 1999) all annuity
were workmen’s compensation claimants.             reserves must be invested in inflation indexed
The Product                                        instruments. This is a radical change and is
                                                   even stricter than in Chile, where there is no
The legislation obliges claimants to select an
                                                   obligation to be in Unidades de Fomento –
annuity company to provide the guaranteed
                                                   although the vast majority of the companies
benefits. Only in the case of old-age pensions
                                                   are)
can a claimant draw a programmed
withdrawal.                                        On receipt of the Monto Constitutivo the
                                                   annuity company is obliged to set up a reserve
The companies compete on the basis of
                                                   on the same 3.5% basis in which it was
products or services that they offer in addition
                                                   assessed. In addition, all the companies are
to the basic pension.        These additional
                                                   required to create a series of additional
benefits are also regulated by the CNSF and
                                                   reserves, including:
include:
                                                   - A reserve for fluctuations in investment
                                                   returns, to be constituted from 15% of
                                                   earnings in excess of the 3.5% statutory rate;


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- An additional reserve (de "prevision") of 2%                         D&D).
of the base reserve, to compensate for any
                                                                       The average individual annuity in the forecast
adverse mortality experience, and
                                                                       has a value (single premium) of about
- A special mathematical reserve constituted                           US$33,000. These values are smaller than the
out of favourable deviation between the actual                         average single premium in Chile and about a
vs. planned reserves (i.e. a positive deviation                        third of the average value in Argentina... due
of more than 5%).                                                      in part to the lower average wage and in part
                                                                       to a lower level of benefits per case. The
- In addition to the reserves, the companies
                                                                       following is the AMIS forecast of the
have to meet the additional marketing and
                                                                       Mexican annuity market.
administrative expenses leading to both
accounting and financial loss on all new
                                                                       Table 12: Mexico: Forecast of Annuity Market
annuity sales.
                                                                               YEAR     Projected Annuity Sales
  Figure 25: Mexico - Technical Reserves                                                (US$ millions)
             (Mexican $ Millions)                                              1997                           $600
                                                                               1998                          1,650
                                                              9,933
                                                                               1999                          1,970
                                                     7,391                     2000                          2,020
                                             5,357
                                                                               2001                          2,100
                            3,097                                              2002                          2,170
           1,346



          Dec-97           Mar-98           Jun-98   Sep-98   Dec-98
                                                                       Within five years or so it is easy to imagine an
    Source: CNSF Pensions Insurance Statistics
                                                                       industry with over US$10 billion in reserves
                                                                       to invest.
Over the last 24 months, the reserves have                             ANNUITIES IN PERU
grown to $10 billion Mexican pesos.
                                                                       The Role for Annuities in the Pension
Commercialisation                                                      System
There are around 2,400 approved and                                    The annuity under the Peruvian AFP system is
registered pension advisers (in addition to                            also an option, i.e. the member may elect a
each company’s sales agents) who act as                                Programmed Withdrawal on the normal
consultants and brokers in placing the annuity                         retirement age.      However, an important
contracts. These professionals are monitored                           difference between the Peruvian system and
by the CNSF and obliged to complete at least                           the others is the way in which survivors’ and
50 hours of formal training each year – much                           disability pensions are arranged.
like an IFA in the US. In fact, generous
training courses are provided via the annuity                          As we have seen, in Chile, Argentina and
companies.     In addition, all the annuity                            Mexico, under the group disability and
companies have signed an ethical code of                               survivors’ pension programme, the member or
practice, to ensure they control their sales                           his beneficiaries are given the option to elect
force and brokers.                                                     an annuity once the Aporte Adicional is paid.
The rates of commission vary, but the market                           In Peru the assured pension must always be
average in December 1998 was 1.9% of                                   paid directly by the insurer of the group
premiums.                                                              policy, i.e. these companies offer two forms
                                                                       of cover:
Market Volumes
The MEXICAN ASSOCIATION OF INSURANCE                                   - The short-term risk that a member will die or
COMPANIES (AMIS) has prepared a forecast                               become disabled, and
of the volume of annuities resulting from the                          - In that case on-going longevity and long-
above two covers (Work Accidents and                                   term financial risk cover throughout the


                                                                                                                     56
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                                                                      ANNUITIES IN LATIN AMERICA


annuity payment period.                           The Annuity in Peru
                                                  Under an annuity contract, the member
This was the method used in Chile until           reaching retirement and or his surviving
1988.                                             dependants, are the beneficiaries of an
Among other things, this has a significant        irrevocable insurance contract that is
impact on the development of annuities in         underwritten by a registered insurance
Peru, as all disability and survivors’            company in Peru.
pensioners do not come to market. This
means that the only annuities really available    Unlike the case in Chile and Argentina,
are the old age annuities.                        Insurance companies in Peru are not divided
                                                  into life and non-life companies. However,
At present, five different insurance companies    the regulations require companies to separate
underwrite the five AFP group D&D                 their activities and account separately for life
insurance policies. Despite a formal and          insurance lines and annuities, including the
public tendering process, over the last few       group disability and survivors’ pension
years the owners of these five companies          insurance.
happen to be the same as own the respective       The benefit of the annuity contract is the life-
AFP. With this, it is unlikely that the annuity   long receipt of indexed pension, denominated
market will develop in Peru at anything like      in Peruvian Sol. The value of the pension is
the pace of the other three markets.              subsequently adjusted every 3 months in line
Pensions in Peru                                  with variations in consumer price inflation in
                                                  Lima. However, since the middle of 1998,
The following table shows the development of
                                                  companies have also been allowed to issue
the number of pensioners in each year and the
                                                  polices in US$ dollars. These policies will
stock of pensioners as at December 1998 and
                                                  not need future adjustments. In this way, the
March 1999.
                                                  initial vale of the US$ annuity is considerably
  Table 13: Number and Stock of Pensioners        higher than the equivalent Sol-denominated
               Old Survivors Disability System    policies – according to David Blake, with
Year                                              similar conditions in the UK, the initial
              Age
1993             -        85          -      85   difference may be as much as 30%.
1994             -       891        12     903
1995            27     1.108        38 1.173      The premium for this contract is a lump sum,
1996           225     2.211        88 2.524      comprising the balance of the member’s AFP
1997           432     2.747       159 3.338      account, together with the cash value of the
1998           972     3.252       271 4.495      Bono de Reconocimiento. This sum is paid at
1999           366       861        97 1.324
Dec-99       2.022    11.155       665 13.842
                                                  the start of the contract.
Jan-99         102       303        39     444    The selection of the annuity provider is made
Feb-99         110       324        30     464    via the members’ AFP, through a system of
Mar-99         154       234        28     416    electronic pricing. No brokers and agents are
Total        2.388    12.016       762 15.166     involved and there can be no commission paid
Distribution 16%        79%        5% 100%
Source: SAFP
                                                  on the placement of the annuity.
                                                  All pension payments are made via the
This shows that nearly the insurance company
                                                  members AFP, i.e. the insurance company has
that underwrites the group D&D risk is
                                                  no direct contact with the pensioner.
currently paying 85% of all pensions. Of the
2,400 old age pensioners, the majority are
                                                  The annuities can be immediate or deferred.
currently drawing programmed withdrawals.
                                                  However, the regulations do no allow
                                                  companies to offer any minimum guaranteed
                                                  periods of payment.


                                                                                               57
ANNUITIES WORKSHOP

                                                                         ANNUITIES IN LATIN AMERICA


Early Retirement and the Bonos de                    matching (calce) and all reserves are assessed
Reconocimiento                                       considering a real technical discount rate of
As in Chile, the Peruvian law allows for a           3% p.a. Furthermore, the tables that are used
member to retire when his balance is                 are the Chilean tables:
sufficient to acquire an annuity of at least         - RV85 (mortality of annuitants),
50% of his average (previous five years)             - B85 (mortality of beneficiaries) and
salary. However, these conditions are of no          - MI85 (mortality of disabled members).
consequence to the Peruvian annuity market,          The annuity calculation formulae are the same
given the relatively small size of the Bono de       as those used in Chile, but considering the
Reconocimiento.                                      different reversion factors, as the levels or
                                                     spouse, child and parents’ benefits differ from
Even, if the Bono was a consideration, the law       those in Chile.
does not permit the member to endorse it over
to the insurance company nor trade it on the         COMPARISON        OF     REGIONAL     ANNUITY
secondary market.                                    MARKETS
                                                     Having reviewed the numbers and concepts, it
What is more, retirement ages are 65 for men         will be clear that these four markets are in fact
and women and there are very few members             very different. Although all of them have
within 10 years of this age.                         implemented an AFP-type system, as with
The Technical Reserves for Annuities                 most things, the problems and opportunities
The regulations governing annuities in Peru          are in understanding the detail and how this is
were issued by the SUPERINTENDENCY OF                likely to affect the development of each
BANKS AND INSURANCE when the AFP                     market.
system was implemented in 1993 and have
not been revised since.                              The following table compare the principal
                                                     variables I have covered.
The terms of the policy are based on those in
Chile prior to 1988, i.e. there is no system of

             Table 14: Condition Comparison among Chile, Argentina, Mexico and Peru
CONDITION                      CHILE              ARGENTINA           MEXICO              PERU
Reserving Rate             Matching-related        4% real            3.5% real          3% real
                              (>4.5%)
Indexation                   IPC / daily              No           IPC / 12 months        IPC / 3
                             (Unidad de                                                   months
                              Fomento)
D&D Cover                     Annuities            Annuities          Annuities             X
Early Retirement                 Yes                  No                 No                 No
Bono de Reconocimiento           Yes                  No                 No                Yes
Who pays the pension           Insurer              Insurer            Insurer             AFP
Brokers                       Yes / >5%           Yes / >2%           Yes / <2%             No
Programmed Withdrawals
D&D                              Yes                 Yes                 No                 No
Old Age                          Yes                 Yes                 Yes               Yes
Basis of Competition           Pension        % profit sharing   Additional Benefits        ?




                                                                                                    58

				
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