**Table 4: Assets of Insurance Companies: Chile, LAC, and OECD (2006)** <u>(as a percentage of GDP)</u>

||Chile|Latin America|High Income OECD<sup>1</sup>|
|---|---|---|---|
|Total Insurance Companies|18.6|4.8|55.4<sup>2</sup>|
|Life|17.6||47.4<sup>3</sup>|
|Non-Life|1.0||10.4<sup>4</sup>|
|Pension Funds|61.0|15.1|39.0|
|Insurance+ Pension Funds|79.6|19.9<sup>5</sup>|94.4|

<u>1. High Income OECD excludes Chile, Hungary, Mexico, Poland, Slovak Rep. and Turkey</u> 2. It excludes New Zealand 3. It excludes Belgium, Czech Republic, Iceland, Netherlands, New Zealand, Portugal, Spain, and Sweden 4. It excludes Belgium, Czech Republic, Iceland, Netherlands, Portugal, Spain, and Sweden Source: AXCO, OECD, AIOS, SVS, SP

# **2.3 The Structure of the Market for Retirement Products**

Chile has adopted a competitive decentralized institutional structure for its retirement market. Only institutions specializing in pension fund administration and life insurance are authorized to offer retirement products. These institutions are established as profit-seeking commercial undertakings. There are no not-for-profit mutual groups and there is only a very small presence of central agencies offering common services to all competing institutions.<sup>10</sup> There is strong competition among a small number of AFPs in the accumulation market and among a larger number of insurance companies in the annuity market.<sup>11</sup> This has resulted in large marketing costs, mostly taking the form of high commissions paid to agents and brokers. However, a growing consolidation of the two markets, which is much more pronounced among pension administrators, the threat of regulation and the adoption of informal agreements among competing institutions in the two main segments of the market have recently resulted in a major containment of marketing costs.

The potential role that central agencies can play in collecting contributions, paying benefits and maintaining accounts, all activities that are characterized by large economies of scale, has been considered but not adopted in Chile, but more intensive use of electronic payment systems is expected in the future.<sup>12</sup> A competitive decentralized asset management structure would stimulate innovation and efficiency, which are essential for attaining high investment returns. On the other hand, centralized administration lowers operating costs because of scale economies and avoidance of high marketing costs, while the centralized offer of life annuities could benefit from using a larger customer base and thus more efficient risk pooling.

The structure of the pension and life insurance sectors evolved very differently in the past 20 years. As shown in Figure 3, the pension sector became very concentrated during the 1990s, with the number of AFPs declining from 20 to 8 between 1990 and 2000 and to only 6 more

> 10 An example is the creation of SCOMP, which plays the role of information clearing housing collecting and communicating electronic quotations in the market for annuities.

> 11 The PW market is handled in a passive way by AFPs.

> 12 Hysteresis in the institutional framework has inhibited action in this area,

6