OREANDA-NEWS. Fitch Ratings does not foresee changes in the ratings of Chilean life insurers, particularly those more active in the annuity business, as a result of the last update in mortality tables in force since July 1, 2016.

The pension segment maintains a central relevance for Chile's economy, both in public discussions about possible modifications to the pension system as a whole and the relevance of AFP's (Pension Fund Managers) and life insurers as two of the largest institutional investors in the country. In December 2015, assets managed by life insurance companies reached USD46.7 billion and annuities premium income totalled USD4.5 billion, representing about 1.9% of the country's GDP and 62% of the total insurance industry's premium.

The progressive increase in life expectancy of the population is an inescapable reality, reason why the parameters for annuities calculations must be adjusted regularly to reflect the best life expectancy estimation of the whole population. Besides longevity studies carried out by insurers themselves to adjust the rates of annuities, the Superintendence of Pensions and the Superintendence of Securities and Insurance together update the mortality tables in regular basis in order to be able to establish the minimum reserve requirements for future pension obligations applicable for insurers and pension fund managers.

After the last major adjustment in mortality tables (2008), periodic review and updates have allowed smooth adjustments in reserves and therefore in pensions. The isolated effect of higher life expectancy of the population will have a negative effect on their pensions, since the same accumulated fund should be distributed amongst a greater number of months of remaining life. The last adjustment of Chilean mortality tables considered an average life expectancy increase of seven and 14 months for men and women respectively.

The updated mortality tables, with data from 2014, replaced the tables which had data corresponding to 2009 and 2006. Initial authority estimations consider 1.8% to 2.3% range of reduction in new pensions. These update will also affect the reserve stock carried by insurance companies for about USD530 million, equivalent to 1.3% of total life reserves and 12.3% of equity in December 2015. Similar to previous updates of mortality tables, most of the insurers decided to apply a gradual adjustment of reserves constitution within six years, which match with the maximum duration of current mortality tables before a new update takes place.

The rate offered by AFP's and insurance companies to new pensioners incorporate a multiplicity of variables whose combination may offset or increase the effect of longer longevity expectancy, though the return for investments remains as a key variable.

The average pension rate offered by insurance companies, maintains a strong correlation with the downward trend of benchmark interest rates (TM), showing both a decreasing tendency between 2012 and early 2015 and then a slight upturn. Therefore, the spread between annuities rate and TM has increased at April 2015, due to the effect of changes in the parameters of the calculation for annuities reserves constitution required by the regulator. The main change incorporated the adoption of a vector rate to discount the present value of future pensions, significantly reducing the reserves requirement for new annuities and thus improving the pension`s rate offered.

The average monthly annuities reached UF12.42 (USD490) at June 2016, which was benefited from higher interest rates started in 2015, and higher amounts of personal savings, which exhibits a steadily increasing tendency. Regulatory knowledge by market agents, mainly retirement advisors, has affected the rates by anticipating or postponing retirement decision.

These resulted in two peaks in the number of annuities contracted, one in the period February-May 2015 and one for March-May 2016 and has also shown a preference of annuities instead of AFP retirement product in the last 12 months. Meanwhile, in May and June 2016, prior to the application of the new mortality tables, the number of annuities requested showed a sharp drop of 27% compared to previous year.

Fitch expects the annuities segment will tend to stabilize around the third quarter of 2016, retaking rates ranges more aligned to historical trend.