Fitch: Colombia’s Proposed Pension Reform Will Create Near-Term Pressure on Pension Insurance

Colombia’s pension reform bill recently introduced by the national government is likely to pressure insurers focused on annuities and pension insurance, according to Fitch Ratings. However, the reform should not have widespread rating implications, as Fitch-rated Colombian insurers write negligible/limited amounts of life annuities and pension insurance/disability and survivor business.

Many aspects and conditions for contracting pension insurance under the proposals have yet to be defined, with the effect on future growth of pension insurance unclear. However, no Fitch-rated company has a premium concentration in these two business lines that exceeds 31%.

The lower underwriting of both annuities and pension insurance will reduce premiums and pressure earnings of insurers with exposure, since these two lines of business comprise nearly 12% of the premiums in the sector. When a disability or survivor claim occurs, it becomes a life annuity either for the disabled or the survivors. Life annuities, including old age, disability or survival pensions were 6% on average in the last five years of the total premiums of the insurance sector and 50% of the total reserves of the sector as of December 2022.

However, over the medium-to-longer term, redirecting capital to less capital-intensive business lines could improve returns, due to the high levels of claims and the risks of longevity, reinvestment and duration of these obligations. Underwriting conditions have become increasingly complex, with premiums insufficient to offset the risks inherent in this line of business.

Under the pension reform proposal, the majority of life annuities will be issued by Colpensiones. Currently, only private funds buy disability insurance. If the reform passes then all disability life annuities will be handled by the public fund, which would be the only buyer of disability and survival insurance. All life annuity insurance contributions below 3x minimum wages would also be managed by Colpensiones, implying a significant decrease in the future assets administered by the insurance sector.

The bill would redirect pension contributions from private managers and toward the public system. Private funds administer obligatory pension savings of some 346 trillion pesos, about $74.7 billion, equivalent to nearly 30% of Colombia’s GDP. Profitability, diversification, liquidity and duration of insurance portfolios will be negatively affected if the market for public and corporate debt substantially decreases.

If the government decides against a tender it would likely result in a deterioration of profitability in the short term, but an improvement in the long term since companies would no longer have a business line that has not been historically profitable. If the government does decide to have a tender, it would likely increase premiums and profitability in the short term as a result of full coverage of the population making pension contributions, since this insurance is currently only purchased by the pension funds, but a tender would also increase leverage ratios.

The effect on rated issuers depends on whether the government decides to underwrite the policy in the private insurance market, whether it opens up a single tender, or divides the population into segments and opens multiple tenders to cover them. The allocation of 2% of contributions to survival and disability insurance may not cover longevity risks correlated to higher life expectancies. The absence of long-term assets available in the Colombian market to match the duration of these obligations that can exceed 40 years. Another concern is that the beneficiaries increase for legal reasons without being considered in the original terms of the policy.

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