Hostname: page-component-586b7cd67f-rcrh6 Total loading time: 0 Render date: 2024-11-22T08:32:57.305Z Has data issue: false hasContentIssue false
  • English
  • Français

An analysis of money's worth ratios in Chile

Published online by Cambridge University Press:  29 October 2007

CRAIG THORBURN ,
ROBERTO ROCHA  and
MARCO MORALES
CRAIG THORBURN
Affiliation:
Operations Policy Department, World Bank
ROBERTO ROCHA*
Affiliation:
Operations Policy Department, World Bank
MARCO MORALES
Affiliation:
Diego Portales University, Santiago de Chile
*
*Correspondence address: Roberto Rocha, [email protected]
Get access Rights & Permissions [Opens in a new window]

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.

Type
Research Article
Information
Journal of Pension Economics & Finance , Volume 6 , Issue 3 , November 2007 , pp. 287 - 312
Copyright
Copyright © Cambridge University Press 2007

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Benjamin, B. and Pollard, J. H. (2001) The Analysis of Mortality and Other Actuarial Statistics. London: Institute of Actuaries and Faculty of Actuaries.Google Scholar
Brown, Jeffrey, Mitchell, Olivia S., and Poterba, James M. (2001) The role of real annuities and indexed bonds in an individual accounts retirement program. In Jeffrey, Brown, Mitchell, Olivia S., Poterba, James, and Warshawsky, Mark, The Role of Annuity Markets in Financing Retirement. Cambridge, MA: MIT Press.CrossRefGoogle Scholar
Brown, Jeffrey, Mitchell, Olivia S., Poterba, James M., and Warshawsky, Mark J. (2001) Taxing retirement income: nonqualified annuities and distributions from qualified accounts. In Jeffrey Brown, Jeffrey, Olivia, S. Mitchell, James, M. Poterba, and Mark, J. Warshawsky, The Role of Annuity Markets in Financing Retirement. Cambridge, MA: MIT Press.CrossRefGoogle Scholar
Brown, Jeffrey, Mitchell, Olivia S., Poterba, James M., and Warshawsky, Mark J. (2001) The Role of Annuity Markets in Financing Retirement. Cambridge, MA: MIT Press.CrossRefGoogle Scholar
Cannon, Edmund and Ian, Tonks (2004) UK annuity rates, money's worth and pension replacement ratios 1957–2002. The Geneva Papers on Risk and Insurance, 29(3): 371–393.CrossRefGoogle Scholar
Dus, Ivica, Raimond, Maurer, and Mitchell, Olivia S. (2003) Betting on death and capital markets in retirement: a shortfall risk analysis of life annuities versus phased withdrawal plans. MRRC Working Paper, WP2003-063.CrossRefGoogle Scholar
Finkelstein, Amy and James, Poterba (1999) The market for annuity products in the United Kingdom. NBER Working Paper no. 7168, National Bureau of Economic Research, Cambridge, MA.Google Scholar
James, Estelle, Guillermo, Martinez, and Augusto, Iglesias (2006) The payout stage in Chile: who annuitizes and why? Journal of Pension Economics and Finance, 5(2): 121–154.CrossRefGoogle Scholar
James, Estelle, Guillermo, Martinez, and Augusto, Iglesias (2004) Postponed vs. early access to individual accounts and the fiscal implications of the minimum pension guarantee in Chile. Paper presented at the AEA meeting, January.Google Scholar
James, Estelle, Xue, Song, and Dimitri, Vittas (2003) Annuity markets around the world money's worth to annuitants and how do insurance companies cover it?Google Scholar
Liu, Sheen, Howard, Qi, and Chunchi, Wu (2004) Taxes, default risk and corporate.Google Scholar
Ministry of Labor (2004) Primera Encuesta de Protección Social (First Survey of Social Protection). Santiago de Chile.Google Scholar
Mitchell, Olivia S., Poterba, James M., Warshawsky, Mark J., and Brown, Jeffrey R. (2001) New evidence on the money's worth of individual annuities. In Jeffrey Brown, Jeffrey, Mitchell, Olivia S., Poterba, James M., and Warshawsky, Mark J., The Role of Annuity Markets in Financing Retirement. Cambridge, MA: MIT Press.Google Scholar
Orszag, Mike (2001) Retirement income decisions. Paper presented at IFID Conference, Fields Institute of Mathematical Sciences, Toronto, September.Google Scholar
Rocha, Roberto, Marco, Morales, and Craig, Thorburn (2006) An econometric analysis of the annuity rate in Chile. Working Paper No 3929 (June), The World Bank.Google Scholar
Rocha, R., and Thorburn, C. (2006) Developing Annuities Markets: The Experience of Chile. Washington, DC: The World Bank.CrossRefGoogle Scholar
Walker, Eduardo (2005) Annuity Markets: Competition, Regulation and Myopia? Unpublished manuscript, Catholic University of Chile, December.CrossRefGoogle Scholar