Skip to main content

Life insurance companies’ investment abroad and the internal rate of return on Chilean annuities

Abstract

The Chilean insurance industry has experienced significant growth in recent years through annuity sales, requiring life insurance companies to actively manage longevity and reinvestment risks. As a result, the regulator opened up investment options in international instruments in order to diversify portfolios and increase the expected internal rate of return on annuity policies. We analyse both the determinants of Chilean life insurance companies’ investment abroad and what effect investment abroad has on the internal interest rates paid on annuities. We fit regression models by OLS fixed effects and GMM to information on 15 life insurance companies for the period of March 2008–September 2019. Investments abroad persist over time and managers are seen to actively allocate these. Furthermore, companies with greater investments abroad are more likely to increase annuity payouts in the range of 2.2% to 4.2%. Finally, we find that a more competitive insurance market could increase pension payouts from 3.1% to 3.7%. Policymakers may use these results to continue diversifying portfolios and to manage the structure of the life insurance market to further increase annuitants’ welfare.

This is a preview of subscription content, access via your institution.

References

  1. Arellano, M., and S. Bond. 1991. Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The Review of Economics Studies 58 (2): 277–297.

    Article  Google Scholar 

  2. Arellano, M., and O. Bover. 1995. Another look at the instrumental variable estimation of error-components models. Journal of Econometrics 68: 29–51.

    Article  Google Scholar 

  3. Berdin, E., and H. Gründl. 2015. The effects of a low interest rate environment on life insurers. The Geneva Papers on Risk and Insurance—Issues and Practice 40 (3): 385–415.

    Article  Google Scholar 

  4. Berstein, S.M., and R.A. Chumacero. 2006. Quantifying the costs of investment limits for Chilean pension funds. Fiscal Studies 27 (1): 99–123.

    Article  Google Scholar 

  5. Blundell, R., and S. Bond. 1998. Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics 87: 115–143.

    Article  Google Scholar 

  6. Davis, E.P. 2002. Prudent person rules or quantitative restrictions? The regulation of long-term institutional investors' portfolios. Journal of Pension Economics & Finance 1 (2): 157–191.

    Article  Google Scholar 

  7. Davis, E.P. 2005. Pension fund management and international investment—A global perspective. Pensions: An International Journal 10 (3): 236–261.

    Article  Google Scholar 

  8. De Menil, G. 2005. Why should the portfolios of mandatory, private pension funds be captive? (The foreign investment question). Journal of Banking & Finance 29 (1): 123–141.

    Article  Google Scholar 

  9. Ellul, A., C. Jotikasthira, and C. Lundblad. 2011. Regulatory pressure and fire sales in the corporate bond market. Journal of Financial Economics 101 (3): 596–620.

    Article  Google Scholar 

  10. Fernandez, V. 2014. Stock volatility and pension funds under an individual capitalization-based system. Journal of Business Research 67 (4): 536–541.

    Article  Google Scholar 

  11. Financial Market Commission. 2019. Quarterly statistical report (September) [In Spanish]. https://www.svs.cl/portal/estadisticas/606/articles-28236_doc_pdf.pdf. Accessed 3 Jan 2020.

  12. Fontaine, J. 1999. Are there (good) macroeconomic reasons for limiting external investments by pension funds? The Chilean experience. In The economics of pensions: Principles, policies, and international experience, ed. S. Valdés-Prieto, 251–274. Cambridge: Cambridge University Press.

    Google Scholar 

  13. Gründl, H., and D.J. Gal. 2016. The evolution of insurer portfolio investment strategies for long-term investing. Financial Market Trends, OECD Journal 2: 1–55.

    Article  Google Scholar 

  14. James, E., G. Martinez, and A. Iglesias. 2006. The payout stage in Chile: Who annuitizes and why? Journal of Pension Economics & Finance 5 (2): 121–154.

    Article  Google Scholar 

  15. Mitchell, O.S., and J. Ruiz. 2011. Pension payments in Chile: Past, present, and future prospects. In Securing lifelong retirement income, ed. Olivia S. Mitchell, John Piggott, and Noriyuke Takayama. New York: Oxford University Press.

    Chapter  Google Scholar 

  16. Morales, M., and G. Larraín. 2017. The Chilean Electronic Market for Annuities (SCOMP): Reducing information asymmetries and improving competition. The Geneva Papers on Risk and Insurance—Issues and Practice 42 (3): 389–405.

    Article  Google Scholar 

  17. OECD. 2015. Regulation of insurance company and pension fund investment. Paris: OECD.

    Google Scholar 

  18. Rocha, R., and C. Thorburn. 2007. Developing annuities markets: The experience of Chile. Washington, DC: The World Bank, Directions in Development, Finance.

    Google Scholar 

  19. Rocha, R., M. Morales, and C. Thorburn. 2008. An empirical analysis of the annuity rate in Chile. Journal of Pension Economics and Finance 7 (1): 95–119.

    Article  Google Scholar 

  20. Roldos, M.J. 2004. Pension reform, investment restrictions and capital markets (No. 4). International Monetary Fund

  21. Roodman, D. 2009. How to do xtabond2: An introduction to “difference” and “system” GMM in Stata. The Stata Journal 9 (1): 86–136.

    Article  Google Scholar 

  22. Ruiz, J. 2014. Annuity choice in Chile: A dynamic approach. Emerging Markets Finance and Trade 50 (5): 6–21.

    Google Scholar 

  23. Ruiz, J.L. 2018. Financial development, institutional investors, and economic growth. International Review of Economics & Finance 54: 218–224.

    Article  Google Scholar 

  24. Vaughan, T. 2012. Life insurance: Providing long-term stability in a volatile world. Risk Management and Insurance Review 15 (2): 255–261.

    Article  Google Scholar 

  25. Walker, E. 2006. Optimal portfolios in defined contribution pension systems. Abante, 9 (2): 99–129.

    Google Scholar 

Download references

Author information

Affiliations

Authors

Corresponding author

Correspondence to José L. Ruiz.

Ethics declarations

Conflict of interest

On behalf of all the authors, the corresponding author states that there is no conflict of interest.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Appendix

Appendix

Table 4 Financial information—quarterly average (March 2008–September 2019) (in USD thousands, September 2019)
Table 5 Description of the variables used to model investment abroad in USD in the annuity industry
Table 6 Description of the variables used to model the internal interest rate in annuities
Table 7 Summary statistics
Table 8 Correlation matrix for the variables used to model the ratio of investment abroad in USD in the annuity industry
Table 9 Correlation matrix for the variables used to model the interest rate in annuities
Table 10 Number of acceptances according to the intermediation request (January 2008 to September 2019)

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Escudero, C., Ruiz, J.L. Life insurance companies’ investment abroad and the internal rate of return on Chilean annuities. Geneva Pap Risk Insur Issues Pract 46, 688–709 (2021). https://doi.org/10.1057/s41288-020-00182-7

Download citation

Keywords

  • Annuities
  • Life insurance companies
  • Foreign investments