Creating a comprehensive central register on performance along the lines suggested above and compulsory use of standardized disclosure templates will contain the tendency to abuse illustrations of future performance and projected bonuses and will play a big part in containing deceptive practices. Regulating pricing policies and the setting of initial payments is another option that may be more relevant for countries with less developed insurance markets (see section 4 above).

## **6.6 Prohibition of Perverse Marketing Practices**

When longevity risk is shared among annuitants, competition in the market for variable payout annuities may take a perverse form. In order to increase their market share and expand their business, annuity providers with a preponderance of low-risk clients may decide to offer attractive terms to new clients with higher-risk characteristics, effectively forcing low-risk annuitants, i.e., individuals with short life expectancy, to share the higher longevity risk of highrisk annuitants and thus causing unfair transfers across different groups.

Admittedly such marketing campaigns may not be easy to design and implement. But a more likely occurrence is a friendly or hostile merger of providers with different risk profiles. When marketing policies undergo drastic change, annuitants should be allowed to switch to another provider within a specified period of time and without incurring any exit fees.

Such measures may not prove adequate if annuitants do not respond in a timely fashion to the period of no exit fees. In fact, given their old age and the general lack of consumer responsiveness to price signals in retail financial markets, it is unlikely that they will do so in sufficiently large numbers. A more drastic and effective protection of the rights of low-risk annuitants would need to be provided by regulators and supervisors.

Providers of VPAs depend on their investment performance and their management of longevity risk to attract new business. It is important that marketing regulations deter providers and their brokers from emphasizing recent investment returns that are not good predictors of future performance, but rather focus on factors that affect long-term performance, such as the soundness of their investment policies, the level of their operating costs and fees, and their profit-sharing policies.

# **7. Market Structure, Prudential Regulation and Government Guarantees**

## **7.1 The Regulation of Market Structure**

<mark>A key policy question concerns the institutional organization of the market for annuity products. The choice is between decentralized competitive structures, which prevail in most OECD countries, and the creation of centralized agencies that are responsible for all or some of the services offered by annuity providers. A centralized agency for some segment of the market may, of course, operate alongside decentralized structures in other segments.</mark> Decentralized competitive market structures promote greater competition, innovation and efficiency. A major advantage is the ability to experiment on a small scale as individual institutions introduce new products or practices in an attempt to gain competitive edge. In 29