All types of life annuities, especially single and joint annuities with guaranteed periods as well as escalating annuities, will be included in the menu of permitted products. Although joint life annuities with guaranteed periods of payment will mitigate the adverse effects of unisex mortality tables, their voluntary use by married couples may decrease their effectiveness.

# **Pricing, profit sharing and switching rules**

Life insurance companies will be free to use their own mortality rates and calculate the initial payments according to their own pricing and marketing policies. They will be free to set their own guaranteed benefits and entry or exit fees, subject to adequate disclosure. However, the authorities will stipulate the interest rate yield curve that will be used for the calculation of technical provisions. This will be based on the highest-rated (AAA) euro area central government bonds spot rate yield curve, published on the European Central Bank’s website. The stipulated interest rates will be conservative and will require the maintenance of a high level of reserves relative to the level of guaranteed benefits.

Insurance companies will be required to observe a minimum profit sharing rate of 50 percent. This is much lower than the proposals in Poland and Hungary. Competition will presumably force companies to operate with high profit participation rates but companies will seek to maintain some stability in their profit sharing policies and absorb the impact of years with negative results. However, the profit participation rate will not be allowed to be lower than 50 percent of profits in any one year.

Annuitants will be allowed to switch providers every three years, subject to an exit fee. Switching is an unusual feature of annuity markets that can cause many complications (see the brief discussion in section 3.5 and Box 2 below). Switching possibilities are expected to intensify the moral hazard effect and the search for groups of young retirees with impaired health.

Available evidence from the accumulation phase in most countries around the world has shown that switching is often driven by the interests of agents and brokers and is not based on sound financial criteria, such as low operating costs, high profit-sharing rates and consistent and sound investment policies. Switching in response to recent investment performance is often misguided. It remains to be seen whether the greater competition associated with the switching option will result in net benefits for annuitants.

The right to switch annuity providers is a useful consumer protection feature in the case of variable annuities when companies make drastic changes in their marketing policies or are involved in mergers with other companies with very different risk profiles. In these circumstances, exit fees should be suspended in order to allow undeterred switching. In addition, rules should be adopted to ensure that exit fees are not excessive and that portable balances are not subject to improper valuations.

Life insurance companies will be free to use their own interest rates for pricing purposes. If they decide to offer lower guaranteed benefits, they will be required to hold lower 47