The Mexican Pension Annuity Market rate, the inability of companies to establish sound premium rates<sup>15</sup> may expose themselves and annuitants to undesirable level of risk.

For annuitants, fixed technical parameters are no guarantee of good value products in an environment of changing circumstances.<sup>16</sup> The Chilean experience, reported in the Box 1, would suggest that annuitants can receive a good value for their premia in a highly competitive and efficient market even if technical parameters are deregulated.

# **_II.C Evolution of Liabilities_**

Mexican pension annuity providers need to form a variety of technical provisions<sup>17</sup> for both pension and additional benefits.<sup>18</sup> Due to the fact that pension annuities are all immediate premium annuities, the largest provision is obviously the net mathematical (or premium) reserve (NPR) ( _reserva de riesgos en curso_ ).<sup>19</sup> This is formed with the immediate premium of IV and RT benefits and it backs the provision of annuities considering a technical rate of 3.5 percent in real terms. Companies have also to constitute the premium reserve corresponding to additional economic benefits in which case the use of a technical rate of 1 percent in real terms is required. The NPR reserve is gradually “earned” when benefits are paid and it has always represented between 95 percent and 97 percent of total reserves in the 1997 – 2005 period. The contingency reserve ( _reserva de contingencia o de previsión_ ) is used to cover possible statistical deviations in the expected loss ratio and it is formed with 2 percent of the mathematical reserves for basic pension and additional benefits.<sup>20</sup> The special mathematical reserve for basic pension benefits ( _reserve matemática especial_ ) is used to cover possible systemic improvements in the longevity of the annuitant pool for non disabled pensioners. The reserve for fluctuation in investments ( _reserva para las fluctuaciones en inversiones_ ) is used to cover for unexpected fluctuations in the return on the investment of the reserves. This reserve is constituted by a portion of the excess investment rate of return of the market portfolio over the technical interest rate (3.5 percent real). Finally, the loss reserve ( _reserva para obligaciones pendientes de cumplir_ ), is used for liabilities that providers have with their pensioners. The next table reports the behavior of the different types of reserves just mentioned within the period 1997 – 2005.

> 15 Sound rates are based on sound insurance principles and have regard to the portfolio being written and the changing social, economic, legislative and technological environment.

> 16 Which in the case of mexico is simply determined by the defined benefit nature of the IV and RT pensions.

> 17 The methods for the formation of such reserves are detailed in SHCP (1997).

> 18 The share of technical provisions for additional benefits was only 2 percent in 2005.

> 19 The NPR is the long plan equivalent of the unearned premium reserve (UPR) for P&C insurers.

> 20 Annuity premiums include a 3 percent of surcharge composed by 2 percent for mortality deviations and

> 1 percent for administrative and acquisition cost.

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