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receiving the PW payments, and upon his/her death, the residual balance goes to the heirs as a bequest. TWs involve a fixed drawdown for a number of years (most commonly 1 year) followed by a deferred annuity, and can be considered as annuities for all practical purposes. PW holders may buy an annuity with the remaining balance provided that the annuity is larger than the minimum pension.

The number of pensioners under the new system has increased significantly, reaching 520,000 in 2004. As shown in Table 1, the increase in the number of pensioners has led to a strong demand for both annuities and PWs, and a fast growth of the Chilean insurance sector in the past decade. The rapid expansion of the insurance sector is reflected in the increase in total premiums from 2 percent of GDP in the mid-1980s to more than 4 percent of GDP in 2004, half of which comprising sales of immediate life annuities. Total assets also grew rapidly from 5 to 20 percent of GDP in the same period.

The number of retirees choosing annuities has increased considerably in the past 20 years. As shown in Table 1, the share of pensioners that has chosen annuities has increased to more than 60 percent, including the small number of TW holders. These numbers imply one of the highest rates of annuitization in the world. There is a strong association between annuitization and early retirement in Chile – 60 percent of all annuitants are early retirees and only 15 percent are normal age retirees. The remainder includes disabled retirees and survivors.

The high rate of annuitization in Chile and its relation to early retirement is the result of several factors. First, restrictions on lump-sums increase the demand for all retirement products, including annuities. Second, the absence of a PAYG benefit and the low level of the minimum pension imply that middle and higher income retirees who take PWs are substantially exposed to investment and longevity risks. Therefore, they may find attractive the protection provided by annuities. Moreover, these retirees tend to be early retirees precisely because only higher income retirees can meet the conditions for early retirement. Third, the marketing of retirement products is one-sided. AFPs focus on the accumulation phase of the pension business and do not market PWs actively. By contrast, life insurance companies depend on the annuity business and have marketed their products aggressively. Annuity brokers obtain their income from commissions on annuity premiums, frequently inducing workers to retire early and annuitize.

**<u>Table 1: Breakdown of Stock of Pensions, by Type of Instrument, 1990-2004</u>**

|Year|Total|P<br>Number|Ws<br>% of Total|T<br>Number|Ws<br>% of Total|Annu<br>Number|ities<br>% of<br>Total|
|---|---|---|---|---|---|---|---|
|1990|57,119|36,696|64.2%|148|0.3%|20,275|35.5%|
|1995|190,400|98,699|51.8%|6,803|3.6%|84,898|44.6%|
|2000|343,965|147,532|42.9%|6,632|1.9%|189,801|55.2%|
|2004|520,793|196,242|37.7%|6,193|1.2%|318,358|61.1%|

Source: SAFP The structure of the pension and life insurance sectors evolved very differently in the past 20 years. As shown in Figure 1, the pension sector has become very concentrated, with the number of AFPs declining from 20 to only 6. This reduction in the number of participants is reflected in the sharp increase in concentration ratios. By contrast, the fast increase in the number of annuity contracts in the 1990s attracted new entrants, increasing the total number of life insurance companies to 34 by the late 1990s, 23 of which provided