FNE launches its first market study on the annuity market

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FNE launches its first market study on the annuity market

The FNE has launched its first market study this past May the 30th, on the annuity market. This launch marks the first use of the new power to perform market studies given to the FNE during the latest amendment to the Competition Law.

The Chilean pension market can be divided into two key periods: savings and payment. In the payment phase, those individuals who save a certain amount of funds, may choose to either have their pension paid according to schedule set by the government (retiro programado), opt for an annuity (rentas vitalicias), or a combination of these two systems.

The market study focuses on the annuity market which has the particularity of having a government supervised exchange (called SCOMP) were all retiree must request quotes for both forms of pensions. In this exchange, information about retirees and their preferences are made available to all companies that wish to make offers. Offers are then presented in one document to the retirees showing the pension offered and the risk assessment of each company. After that, retirees may opt for: (i) one of the offers made; (ii) negotiate externally (oferta externa) either directly with an insurance company or with the help of an intermediary, or (iii) request a binding auction by choosing at least three companies that made offers in the SCOMP.

The FNE, in the research carried out before the launch, based solely on public information, found five reasons to sustain that the annuity pension market could have a competition problem:

  • A considerable percentage or retirees are opting for annuity that are worse than the best offer they receive in the SCOMP both in the amount of the pension and on the risk assessment of the insurance company;
  • A large percentage of retirees (more than 65%) which are advised by an insurance company agent, choose an annuity which does not represent the best offer presented in the SCOMP;
  • The binding auction, where the retiree chooses at least three companies to make offers which will be binding for both parties has not been used in practice. Only 106 auctions have been requested since 2004, and more than 27.000 retirees opt for an annuity a year;
  • The use of the risk assessment of the insurance companies by the SCOMP seems as an opaque criteria to incorporate as a relevant factor to make a decision as it seems very difficult for retirees to adequately assess the real risk they face by switching between companies with different risk assessments; and
  • There is heterogeneity in regards to the number of offers retirees receive. Although each retiree receives an average of 10 offers, a significant number of retirees receive less offers and a portion receive none.

For more information regarding this study, please see a document (in Spanish) which explains all the issues discussed above in further detail in the following link:

Spanish versions of these Guidelines may be downloaded here

Resolución de inicio de estudio de mercado de rentas vitalicias

Minuta de lanzamiento de estudio de mercado de rentas vitalicias

Guía de estudios de Mercado