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

2021. The Geneva Papers on Risk and Insurance - Issues and Practice. 46, pages 688?709. DOI: 10.1057/s41288-020-00182-7

C. Escudero H, Jose Ruiz V

Abstract:

The Chilean insurance industry has experienced significant growth in recent years through annuity sales, which entail active management for life insurance companies of longevity and reinvestment risks. In this regard, the regulator expands investment options in international instruments to diversify portfolios and increase the expected internal rate of return on annuity policies. We analyze both the determinants of foreign investment in the Chilean life insurance companies and the effect of foreign investments on the internal interest rates paid on annuities. We use OLS fixed-effects and the Generalized Method of Moments (GMM) for 15 life insurance companies from the year 2008 to September 2019. There is persistence over time of foreign investments, and managers actively allocate investments. Also, companies with more foreign investments are more willing to increase annuity payouts in the range of 2.2 to 4.2%. Besides, a more competitive insurance market could increase the pension payouts in the range of 3% to 3.6%. These results are useful for policymakers to continue diversifying portfolios and to deal with the life insurance market structure to increase welfare for annuitants.

Palabras claves: Annuities, Life Insurance Companies, Foreign investments.

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