Chiles life industry benefits from a stable economy as well as a strong regulatory infrastructure, which enabled life insurers to weather the financial crisis of 2008-2009. With the economy back on a growth path, the life industrys premiums are set to grow by double-digits in 2011. Robin Arnfield reports.
Chile has been one of the worlds wonder economies over the past two decades with reforms slashing the poverty level from 45% of its population of some 17m people in the early 1990s to about 13% today. Now ranked as an upper-income economy, Chiles per capita GDP in 2010 was $12,000, according to statistical agency INE.
But even Chiles economy was no match for the global financial crisis. This was reflected in the countrys GDP which contracted by 1.84% in 2008 and was in sharp contrast to an average annual growth rate of between 5% and 7% sustained during most of the previous decade.
In 2009, Chiles economy was well on the mend, recording a GDP growth rate of just over 2%. Then in February 2010 came another setback in the form of an 8.8 magnitude earthquake, one of the 10 strongest ever recorded in the world and the 20th the country has experienced with a magnitude of 6.2 or higher since 1900. The Chilean Ministry of Finance estimated losses in the 2010 quake at almost 17% of GDP, according to the US Central Intelligence Agency.
But despite this setback, Chile confirmed its reputation as a resilient economy with its GDP recording a growth rate of 5.3% in 2010. Chiles economy also remains among the worlds most competitive.
Confirming this, the Centre for Global Competitiveness in its 2009/10 study on global competitiveness and performance ranked Chile as the 30th most competitive country in the world.
It also ranked Chile as the most competitive economy in Latin America, well ahead of next-ranked countries in the region, Brazil at 56th, Mexico at 60th and Argentina at 85th.
Through the financial crisis, Chiles life insurance industry remained resilient and has also rebounded strongly. A study by Fitch Ratings entitled Industria de Seguros Chilena: Revisión y Perspectivas 2011 (Chilean insurance industry: 2011 review and outlook) highlighted that life insurers return on average equity rose from 6% in 2008 to 22.6% as at September 2010.
Fitch commented that Chiles macro-economic environment is very strong with the countrys sovereign debt rating of A+ the highest government rating in Latin America.
"There was no government bailout of any Chilean insurers or banks during the financial crisis," Franklin Santarelli, Fitchs MD, Latin American Financial Institutions told LII. "Obviously, the profitability of life insurers investment portfolios was reduced during the crisis, and their yield was lowered."
In 2010, total gross life insurance premiums rose by 18.6% to $5.97bn, boosted by a surge in annuity sales, according to Fitch. Life insurers account for around two-thirds of the overall Chilean insurance industry in terms of premium income.
"In 2010, there was an explosive growth [27.7%] in annuity purchases, as the stock market had recovered after the 2008-2009 financial crisis," Rodrigo Salas, Chile-based senior director, insurance companies at Fitch explains to LII. "The value of pension funds had fallen in 2008-2009, leading people to defer buying an annuity. But once the market recovered in 2010, they finally purchased their annuity."
In 2011, Fitch is predicting slower growth in annuity sales, of the order of 10% to 15% compared with 2010.
"The growth seen in 2010 was non-recurring," commented Salas.
Fitch believes that long-term interest rates may rise in Chile, which would help to spur sales of annuities.
Individual life premiums, including universal life, fell by 4.3% to $544m in 2010, Fitch noted. Group credit insurance rose by 9.4% to $868m in 2010.
A feature of Chiles insurance industry is fierce competition, particularly in annuities. Currently 31 life insurance companies compete in a market which according to Swiss Re recorded total life premium income of $4.12bn (CLP2.085trn) in 2009, a 4.1% fall compared with 2008 in local currency terms.
Largest of Chiles life insurers is US insurer MetLife which reported $641m in premium income in 2010. MetLife was followed by Consorcio Vida ($494m), Chilena Consolidada Seguros de Vida ($467m), and Compania de Seguros Corpvida with $426m.
According to Chilean insurance industry regulator Superintendencia de Valores y Seguros/Superintendency of Securities and Insurance (SVS), Chilean life insurers solvency levels in 2010 were close to those seen before the financial crisis. Overall life industry profits rose by 19.47% year-on-year to $976m in 2010, SVS says.
Due to a lack of regulatory barriers against foreign entrants, the Chilean life insurance market is relatively open to foreign companies which now play a major role in the industry. Chilena Consolidada, for example, is controlled by Zurich Financial Services, which in March 2011 agreed to buy Banco Santanders pension and general and life insurance operations in Brazil, Mexico, Chile, Argentina, and Uruguay (See LII257, page 6).
In Chile, Santander Seguros de Vida reported premium income of $333m in 2010 which ranked it fifth. On completion of the deal, Zurich Financial Services will have management control over the joint venture which it intends to fully consolidate. Santander will be a 49% shareholder.
Other significant foreign players include Dutch group INGs unit ING Seguros de Vida, which reported premium income of $249m in 2010.
In Moodys Outlook for the Chilean Insurance Market, Moodys Investor Services says that life insurers have well-established distribution systems, with direct sales accounting for the lions share. According to Moodys, in 2007, 49% of life premium income was attributable to direct marketing. This channel was followed by independent agents (21%) and bancassurance (17%).
So called mass-marketing through retailers is also a notable distribution channel in Chile and in 2007 accounted for about 4% of life premium income, according to Moodys.
UK-based market research firm Finaccord reported that in 2010 30.2% of major Chilean retailers sold at least one form of mainstream insurance.
"Life products sold by retail brands are usually simple protection products such as term life assurance, perhaps offered alongside similarly straightforward accident and health insurances," Finaccord director Alan Leach says (See LII248, p12). "Also, most retailers offering store cards or point-of-sale consumer finance programmes have related schemes to sell creditor/payment protection insurance."
Santarelli adds: "There is a big opportunity for growth, as life insurance penetration in Chile is not even half that of countries such as the US. However, the life insurance market cannot double in size because of low average incomes in Chile. Consumers in the A, B and upper-C groups are the main segments buying life insurance."
Santarelli continued that, by contrast with North America, Chilean life insurers offer a limited range of products.
"The products available are mainly traditional individual and group life, although there are some universal life products," he says. "Due to consumers purchasing power being limited by low annual incomes, and also due to competition in the savings market from banks, stockbrokers, and mutual fund companies, there is a limit on life insurers ability to sell more products to consumers."
According to Moodys: "Individual products include both renewable term and whole life coverage, in both level premium and universal policy forms, whereas group life insurance is generally written on a renewable term basis, and widely used for life insurance for credit products."
Data form market research firm Mintel shows that per capita spending on life insurance products (comprising individual, group and pension products) in Chile was $264 in 2008 and $239 in 2009, rising to an estimated $280 in 2010. Spending on life insurance products as a percentage of GDP fell from 2.6% in 2008 to 2.5% in both 2009 and 2010. Swiss Re data show penetration of life insurance in 2009 at a slightly lower 2.3%.
According to data from Fitch and SVS, individual life accounts for 19% of the Chilean life insurance market, with annuities accounting for 39%; group life for 27%; and death and disability insurance linked to Chiles compulsory contributory pension scheme (Seguro de Invalidez y Sobrevivencia de las AFPs) 15%.
The reason why annuities represent such a significant part of the life insurance business relates to the fact that since 1980 all Chilean employees have been required by law to contribute to a private pension plan, in addition to the state pension scheme. These private plans are administered by six pension fund managers (administradoras de fondos de pensiones/AFPs).
Each AFP offers a choice of five different funds in which pension contributions can be invested, each of which has a different risk profile. Fund A is the most risky, with Fund E the most conservative.
On retirement, Chileans either buy an annuity or keep the money invested in their fund. If they chose the latter option, they are allowed to make pension drawdowns under certain limits.
A portion of each mandatory pension contribution is paid by the AFP to a life insurer that provides death and disability coverage (Seguro de Invalidez y Sobrevivencia de las AFPs). If either of these contingencies are triggered, then the participants accumulated savings, together with a lump-sum insurance benefit typically amounting to the difference between the accumulated retirement fund and the required retirement benefit is paid as an annuity to the beneficiary.
According to Chilean pensions regulator Superintendencia de Pensiones (pensions superintendency), the total value of pension funds at the end of 28 February 2011 was $144.98bn. This represented a 10.9% increase on the $14.23bn held in pension funds in February 2010.
Provida, with $42.97bn of assets, had 29.6% of the pensions market in February 2011, followed by Habitat with $36.35bn (25.1%); Capital with $32.27bn (22.3%); and Cuprum with $29.18bn (20.1%). The two remaining, smaller AFPs are Modelo and Planvital.
Since 2002, Chileans have been able to make additional voluntary contributions into pension funds through an APV (Ahorro Previsional Voluntario/voluntary savings for future pensions), which attracts a tax benefit. Salas says that APVs can be managed by banks, stockbrokers, AFPs, mutual fund companies, and life insurers.
"They are designed for affluent people who find that the mandatory private pension contributions they are making wont be sufficient for their retirement," he says.
Fitch says that the APV market was worth $308m in December 2010.
Despite its size, the annuities business is not the main driver of profitability for life insurers, which comes mainly from selling insurance for credit products such as mortgages.
"There are strict rules governing where annuity funds can be invested," says Salas. "This limits the profit margin [as the spread between the rate the insurer gets and the rate they pay to the person holding the annuity is very low] for annuity providers, as they are required to invest in highly-rated investments, which are low-risk and low-return."
According to SVS, 71% of life insurance companies investments were placed in fixed-income instruments in 2010.
Another factor depressing the profitability of annuities is the fierce competition in the industry.
"Consumers can view all the different annuity providers rates online," says Salas. "Because of the competition, rises in annuity interest rates dont really increase the profitability of the industry. The way that profits will increase will be through greater sales volume."
Santarelli said that annuity providers face a reinvestment risk.
"Theres no perfect way of matching liability and portfolio return," he explains. "The annuity industry has 30 years of accumulated liabilities. As the principal has to be reinvested several times during the lifetime of the retiree, the annuity company may get less advantageous rates when it reinvests this money."
Chilean life insurers also offer index-linked (variable-rate) annuities as an extra annuity that people can buy on a voluntary basis. In December 2010, the voluntary annuity market was worth $111m.
"Because voluntary annuities are not as highly regulated as annuities linked to AFP pensions, they offer more scope for life insurers to invest policy-holders funds in investments that will be more profitable for the insurers (ie, higher risk, higher return)," says Santarelli.
SVS, an autonomous department of Chiles Ministry of Finance, sets the regulatory and accounting standards for all insurers.
"With respect to product licensing, Chilean insurers have to establish subsidiaries or affiliates that focus separately on the life/retirement, general, and credit insurance segments, although personal accident and health insurance can be written either by P&C or life insurers," Moodys notes.
Santarelli adds: "Compared to many Latin American countries, Chiles life insurance industry is highly regulated. The regulator has strict rules on the capitalisation of life insurance firms and the quality of their assets.
For example, any company selling annuities has to have a BBB rating. There is a high degree of transparency, which means that you can get the full details of an insurers investment portfolio, such as its liabilities and assets."
Insurers cannot invest more than 30% of their assets outside Chile.
"If a firm does have foreign investments, it has to hedge them against foreign-currency exposure, as all liabilities are denominated in Chilean Pesos," Santarelli says. "So in practice, life insurers only hold 8% of their assets outside Chile, which is much lower than any other Latin American country. Given that investments have to be high-grade and mainly Chilean, there is a limitation on the ability to find suitable investments."
He added that an insurer can make higher-risk investments, but these would not count as part of their technical reserve for regulatory purposes.
"This means that Chilean insurers are low in exotic investments," he concludes.
Chiles economy bounced back strongly in 2010, a trend that is expected to continue throughout 2011. Putting numbers on the economys prospects, Jose de Gregorio, president of the countrys central bank, said in early-April this year that he expected GDP growth in 2011 to be between 5.5% and 6.5% and inflation to be at 4.3%.
Gregorio stressed that Chiles economy was back on a path of sustainable growth. He forecasts inflation of 4.3% in 2011.
Against the background of the positive state of the Chilean economy, Fitch is forecasting double-digit growth for the life insurance industry in 2011.