Private Pension Annuities in Chile

Studies | Social Security

No. 271
Thursday, December 09, 2004
by Estelle James


Introduction

Table I - Growth of Chile's Life Insurance Industry%2C 1985-2003

“Workers in Chile contribute to privately managed individual retirement accounts.”

1In 1981 Chile adopted a pension system featuring privately managed individual accounts. Traditional government-provided defined benefits for old age were eliminated in the new system. Starting in 1983, payouts from the accounts were permitted and detailed rules governing payouts were put in place. Now with more than 20 years’ experience, the Chilean scheme gives us an opportunity to examine how pensioners and pension providers react when individual accounts replace defined benefit systems, and how detailed regulations shape these reactions.

“Workers can purchase annuities with their account balances.”

What policies should regulators adopt toward annuities and other forms of payouts, and how will their regulations affect worker and insurance company behavior? The issues policymakers must consider include:

  • Will retirees choose annuities over some other form of withdrawal, if given a choice?
  • Will adverse selection pose a problem?
  • Will the insurance industry grow rapidly enough to accommodate the potential new demand for annuities?
  • Will attractive terms be offered to annuitants, or will much of the premium be siphoned off into administrative and marketing costs?

“Retirees receive monthly annuity payments.”

This paper focuses on the development of the annuities industry in Chile over the past two decades — its successes, failures and remaining problems. 2

 

Table II - Total Payouts by Type of Benefit%2C 1983-2002

“Annuities are the chief life insurance product in Chile.”

Chile offers practically the only example of a large life insurance industry with annuities as its major product. In 1980 the Chilean life insurance industry was in its infancy, and the annuity portion was virtually nonexistent. However, the new social security system, which forced people to save for their retirement and greatly constrained their choices during the payout stage, changed this situation dramatically. The industry grew rapidly, and the annuity part grew fastest of all — measured by premiums, reserves and payouts:

  • In 1985 life insurance premiums in Chile totaled only $145 million, but by 2000 they reached $2 billion.
  • Two-thirds of premium income in Chile is for immediate payout life annuities, in contrast to the United States, where less than 2 percent of total life insurance premiums are for individual payout annuities and most of these are for fixed payout periods, not for life. [See Table I.]
  • Payouts from annuities were less than $200,000 in 1985, but by 2002 they exceeded $40 million. [See Table II.]
  • Life insurance reserves were less than half a billion dollars in 1985, but by 2003 they totaled over $14 billion, or 20 percent of GDP, mostly backing retirement. [See Table III.]
Table III - Life Insurance Company Investments and Annuity Reserves%2C 1985-2003

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