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# **1. Introduction**

The increased involvement of the private sector in pension provision has led to a substantial volume of research on the structure, performance, and regulation of private pension funds, both in developed and emerging countries. However, most of the analytical effort has been focused on the accumulation phase of private pension provision. There are fewer empirical analyses of the payout phase, which involves the transformation of the final balance into flows of retirement income through instruments such as annuities and phased withdrawals (PWs). Moreover, most empirical studies of the payout phase involve the computation of money’s worth ratios (the ratio of the expected present value of annuity payouts to the annuity premium) or a simple comparison of the annuity rate (the internal rate of return on annuities) with market interest rates.

While these studies provide a measure of the performance of annuity markets, they do not provide an analysis of the determinants of such performance, particularly the set of determinants related to the structure and regulation of the insurance industry providing annuities. This is due in large part to the absence of sufficient data on annuity payouts, premiums, returns, commissions, the structure of the industry, and the individual characteristics of providers. The lack of critical statistical information is due in turn to several factors, including the immaturity of annuity markets in most countries and weak disclosure rules.

The absence of analysis on the structure and performance of the market for retirement products is cause for concern, as many countries have implemented pension reforms that have included the introduction of mandatory private pillars, and will need to face the payout phase in the near future. Policy-makers in these countries would benefit from more empirical analyses that provide insights and inputs to the design of sound regulation and institutional arrangements. This is particularly the case for annuities, products that involve very long contracts and complex risks.

Chile provides one of the most relevant experiences for countries that have reformed their pension systems and that face the challenge of developing markets for annuities and PWs. This is due to its well-known pension reform of 1981, which involved a move from a public pay-as-you-go (PAYG) system to a fully-funded (FF) system operated by the private sector. At the start of its pension reform in the early 1980s, Chile was a middleincome country without a pension industry, an incipient insurance sector, little regulatory and supervisory capacity, and undeveloped capital markets. Twenty-five years later Chile had reasonably developed markets for retirement products, evidenced by around 320,000 annuity policies and 200,000 PWs, and about 17 life insurance companies providing annuities and managing assets of almost 20 percent of GDP.

The Chilean case enables a more in-depth examination of the performance of annuities markets, not only because of the size of its market but also because of disclosure rules that open access to information on annuity rates, number of policies, premiums, commissions, and the financial statements of individual providers.

The purpose of the paper is to examine the main determinants of annuity rates in Chile, based on data reported by life insurance companies, and identify the regulatory factors that may influence the performance of annuity markets. The paper is structured as follows. The second section reviews briefly the evolution of the Chilean annuities market and the