An analysis of money's worth ratios in Chile

Abstract

Empirical analyses of annuities markets have been limited to a few developed countries and restricted by data limitations. Chile provides excellent conditions for research on annuities due to the depth of its market and the availability of data. The paper utilizes an extensive dataset on individual annuities to examine econometrically a measure of market performance – money's worth ratios (MWRs), or the ratio of the expected present value of annuity payments to the premium. The results show that annuitants in Chile have generally got a good deal for their premiums, as indicated by MWRs higher than one and also higher than those estimated for other countries. The difference between Chile and other countries is striking considering that annuities in Chile are indexed to prices. The wide range of indexed instruments in Chile, allowing providers to hedge their risks while extracting higher returns, helps explain the difference. The high degree of market competition has also contributed to this outcome. Efforts to improve market transparency through a new electronic quotation system have decreased the dispersion of MWRs. Finally, MWRs tend to decrease for contracts with longer durations, reflecting pricing for higher longevity and reinvestment risks. These results are consistent with separate research on the annuity rate, and indicate the need to ensure competition and market transparency, as well as to develop appropriate financial instruments for providers in order to ensure good outcomes for annuitants.

Trading death: The implications of annuity replication for the annuity puzzle, arbitrage, speculation and portfolios

“…Fong, Mitchell, and Koh (2010) estimated that in Singapore the MWR for CPF LIFE (refund 75) annuities in 2008 was 1.37 for women and 1.34 for men, while James and Vittas (2000) computed a MWR in Singapore for both men and women of 1.25. For Chile, Rocha and Thorburn (2007) and Thorburn, Rocha, and Morales (2007) (2011) found MWRs of over 1.20 in 1999 for German men and women. Cannon and Tonks (2004) have estimated that the MWRs for UK males in 1971, 1990 and 1991 were above 1.20.…”

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“…Studies on the UK compulsory and voluntary annuity markets (Finkelstein and Poterba 2002) have compared the money's worth of nominal, real, and escalating annuities, some with guarantee periods of 0, 5, and 10 years; these report that MWRs rise with the length of the guarantee period. Thorburn, Rocha, and Morales (2005) report that the MWRs of guaranteed annuities in Chile are smaller than those of nonguaranteed annuities, possibly due to the fact that long periods of guarantee tend to increase duration, thus reinvestment risk, forcing premiums up for a given value of benefits. 15 The Sixth Schedule of the Insurance Regulations 2004 stipulates that insurers may employ the rates in the UK a(90) tables with a 5-year setback to value their annuity liabilities.…”

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“…Many prior studies have used the MWR notion to measure value for money in a range of annuity products including constant and rising payout products, joint-and-survivor annuities, and annuities with guarantee periods (cf. Mitchell et al 1999;Brown et al 2001;Poterba 2002, 2004;Thorburn et al 2005).…”