2006年-世界发展银行全球_Annuity_Markets_in_Chile___Competition_Regulation_-_and_Myopia__32页_383kb

Summary of "Annuity Markets in Chile: Competition, Regulation and Myopia?"

Core Content

This paper analyzes the relationship between annuity rates in Chile and industry competition, regulation, and the behavioral aspect of myopia among pensioners. The study focuses on the long-term elasticity of annuity rates to changes in the risk-free rate and how regulatory interventions and commission structures have influenced this elasticity.

Main Findings

• Low Implicit Elasticity Before 2001: From 1993 to 2003, the long-term risk-free rate in Chile fell by 3.2 percentage points, while annuity costs increased by only 12.3 percent. This implies a very low implicit elasticity of annuity rates to the risk-free rate, significantly below one.

• Structural Break in 2001: After 2001, the long-run elasticity of annuity rates to the risk-free rate increased rapidly and became statistically equal to one. This change coincided with a significant drop in broker commissions and the introduction of a new draft pension law that proposed greater transparency and a cap on commissions.

• Commission Impact on Annuity Rates: Higher broker commissions were associated with lower annuity rates. This suggests that higher commissions allowed brokers to provide informal (and illegal) cash rebates to pensioners, which may have influenced pensioners' preferences and reduced competition through annuity rates.

• Myopia and Cash Rebates: Myopic pensioners, who discount future benefits heavily, preferred cash rebates over the present value of annuities. This behavior may have reduced the effectiveness of annuity rates as a competitive tool and increased competition through advance cash payments.

• Regulatory Influence: The legal threat posed by the new pension law led to a generalized drop in broker commissions, which in turn reduced the scope for cash rebates, increased competition via annuity rates, and caused the elasticity to become statistically equal to one.

Key Variables and Concepts

• Annuity Rate (TV): The interest rate charged by life insurance companies (LICOs) on annuities.
• Adjusted Annuity Rate (TVA): The annuity rate adjusted for broker commissions, representing the effective interest-rate cost for LICOs.
• PRC20: The 20-year inflation-indexed bond issued by the Central Bank of Chile, used as a proxy for the risk-free rate.
• Myopia: Refers to high subjective discount rates, leading pensioners to prefer immediate cash payments over annuities.
• Long-Term Elasticity: The responsiveness of annuity rates to changes in the risk-free rate, estimated as the ratio of the change in annuity rate to the change in the risk-free rate.

Methodology

• The study uses rolling 36-month samples to estimate the long-term elasticity of annuity rates to the risk-free rate.
• Granger causality tests are applied to assess the relationship between interest rate changes and annuity rate changes.
• The Modigliani-Miller framework is used to model the annuity rate elasticity, incorporating the value of the default option and measurement errors.

Results and Interpretation

• Elasticity Change: The long-term elasticity of annuity rates to the risk-free rate was significantly less than one before 2001 but became statistically equal to one afterward.
• Commission and Elasticity: A drop in broker commissions was strongly correlated with the increase in annuity rate elasticity.
• Cash Rebates and Competition: Higher commissions allowed for informal cash rebates, which may have reduced the competitive pressure on annuity rates and increased competition through advance payments.
• Regulatory Impact: The introduction of the new pension law in 2001, which aimed to increase transparency and limit commissions, had a significant impact on the market, leading to more competitive annuity rates and a higher elasticity.

Conclusion

The study concludes that the threat of regulatory reform in 2001 led to a significant drop in broker commissions, reducing the scope for cash rebates and increasing competition via annuity rates. This change resulted in the long-term elasticity of annuity rates becoming statistically equal to one, indicating that annuity rates now fully reflect changes in the risk-free rate. The findings are of importance for regulatory bodies and for understanding the dynamics of annuity markets in defined-contribution pension systems.

Key Regulatory Actions

• Submission of New Pension Law (2001): Proposed an electronic market for annuities and a cap on commissions.
• Legal Implementation (2004): The law was eventually passed in 2004, leading to a structural change in the annuity market.

Implications

• The results suggest that low elasticity before 2001 may have indicated a lack of competition in the annuity market.
• Myopic behavior among pensioners and broker commissions played a critical role in shaping annuity pricing and competition.
• The regulatory intervention was effective in increasing market transparency and competition, leading to a more efficient annuity market.

Figures and Tables

• Figure 1: Compares annuity costs, market rates, and interest rates over time.

• Figure 2: Shows non-adjusted and adjusted annuity rates, and the corresponding spread due to commissions.

• Figure 3: Depicts the annuity payment profile for a 65-year-old pensioner.

• Figure 4: Estimates the elasticity of adjusted and unadjusted annuity rates to the risk-free rate.

• Figure 5: Shows the monthly annuity cost and internal rates of return.

• Figure 6: Illustrates the relationship between adjusted annuity rates and commissions.

• Table 1: Annual averages and descriptive statistics of annuity rates and commissions.

• Table 2: Empirical duration, convexity, and causality tests.

• Table 3: Long-term elasticity estimation results.

• Table 4: Long-term elasticity versus interest rate and commission levels.

• Table 5: Adjusted annuity rates versus commissions (panel regressions).

Final Remarks

The study highlights the importance of regulatory actions and the behavioral aspects of pensioners in shaping annuity markets. It underscores the need for continued monitoring of market dynamics and the potential for policy reforms to enhance competition and efficiency in the annuity sector.