Pensions Fund and compares favorably with the performance of self-administered private pension funds (Vittas 2003).

Reserving policies are deemed by local actuaries to be adequate, at least for the large and medium companies. Actuaries use mortality tables from the<sup>UnitedKingdom,</sup> while future actuarial liabilities are discounted at nominal rates that are close<sup>to</sup> prevailing market interest rates.

The typical life policies are participating policies where 90 percent of profits must be distributed to policy holders. Unit-linked business is not well-developed.<sup>Housing</sup> loans are tied to endowment insurance, though borrowers may opt for<sup>lifecoverona</sup> declining balance basis.

The more advanced companies adopt modem asset/liability management techniques in detennining the allocation of assets. However, the absence of<sup>zerocoupon</sup> bonds and other sophisticated instruments and the general underdevelopment of the local financial markets limit the applicability of such techniques.

The life insurance companies face considerable reinvestment risk arising from the current duration mismatch of their assets and liabilities. This is caused by<sup>thedearthof</sup> long-term assets in the local financial system on the one hand and the prevalence of long duration liabilities on the other. Some insurance companies offer minimum<sup>guaranteed</sup> rates of return on their policies, but these are subject to periodic review, thus<sup>limitingthe</sup> exposure of insurers to a large and persistent fall in the level of interest rates. Guaranteed rates of return are low compared to the current level of interest<sup>ratesandinsurance</sup> companies typically retain considerable discretion over terms and conditions. Nevertheless, insurance companies in several European countries have<sup>beenhit by the</sup> offer of guaranteed returns and caution is advisable.

Endowment insurance policies are linked to housing loans and thus are nominally well hedged. But they raise the possibility of even greater mismatch exposure<sup>if housing</sup> loans were prepaid in the event of a large fall in interest rates, but endowment policies were not surrendered. Admittedly, companies have built in various protective features<sup>in</sup> their operations but could still be exposed to large losses. Similarly,<sup>grouppension</sup> business that is linked to defined benefit plans involves the offer of guaranteed<sup>annuity</sup> options that could expose insurance companies to significant losses in the<sup>eventof a large</sup> and persistent fall in interest rates.

Operating and investment performance varies considerably among individual companies by size. In general, the 3 largest companies operate with<sup>muchlower</sup> administration and acquisition costs of 21 percent of net premiums<sup>againsta hefty41</sup> percent for small companies (Table 7). Large companies earned in<sup>2001(aswellasin</sup> some earlier years) a lower return on their life insurance fund than the smaller<sup>companies.</sup> However, the difference in returns was small and was completely offset by the higher administration and acquisition costs of smaller companies. The higher level of claims of small companies, probably reflecting a greater occurrence of policy surrenders,<sup>andtheir</sup> 8