WPS3926

# **AN ANALYSIS OF MONEY’S WORTH RATIOS IN CHILE**

## **Craig Thorburn, Roberto Rocha, and Marco Morales**<sup>**1**</sup>

### **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.

### World Bank Policy Research Working Paper 3926, May 2006

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. Policy Research Working Papers are available online at http://econ.worldbank.org._ 1 Craig Thorburn and Roberto Rocha are at the Operations Policy Department of the World Bank and Marco Morales is at the Diego Portales University in Santiago de Chile. This paper was derived from a comprehensive report of the Chilean market for retirement products, coordinated by Roberto Rocha and Craig Thorburn (2006), and part of a broader World Bank project on the payout phase of private pension systems involving several country studies. The authors are grateful to Gregorio Impavido for valuable inputs in the early stages of the research. The authors are also grateful to Eduardo Walker, Dimitri Vittas, Augusto de la Torre, Augusto Iglesias, Guillermo Martinez, Solange Berstein, Guillermo Larrain, Alejandro Ferreiro, Ernesto Rios, Osvaldo Macias, Richard Hinz, and several industry participants for comments on earlier versions of the paper.