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Panning for SilverThe Implications of an Ageing Population
Joanne WellsYounger Member Convention 2002
TODAY'S PRESENTATION
Population trends
Opportunities for insurers
Longevity and medical advances
Developments in the pricing and underwriting of risk
Ageing of the ‘baby boomers’
Declining fertility
Improving mortality
Some consequences:– The number of people aged over 50 is forecast to grow by
6m over the next 25 years– Total number of older people is higher and these people are
also living longer– A different target market for the financial services industry
Age profile of the UK is risingTHE CHANGING DEMOGRAPHICS
1.50
1.75
2.00
2.25
2.50
2.75
3.00
1951 1961 1971 1981 1991 2001 2011 2021
Year
Ch
ild
ren
per
wo
man
Replacement level
TFR
Fertility RateDEMOGRAPHICS
Source: Government Actuaries Department
Improving MortalityDEMOGRAPHICS
Males Females
Age 1999 2011 2031 1999 2011 2031
0 79.6 79.9 80.0 83.8 84.1 84.2
60 21.3 22.2 22.9 24.8 25.5 26.1
65 17.0 18.0 18.8 20.1 21.1 21.8
75 9.7 10.9 11.6 11.9 13.1 13.8
85 5.2 5.8 6.4 6.4 6.8 7.7
Life expectancy at different ages
Source: Government Actuary’s Department
0
10
20
30
40
50
60
70
80
90
100
1971 1991 2011 2031 2051
Year
% o
f to
tal
po
pu
lati
on
0
10
20
30
40
50
60
70
80
90
10090+
75-89
60-74
45-59
30-44
15-29
0-14
Median age
Projected
Projected Age Distribution United Kingdom 1971 2070DEMOGRAPHICS
Source: Government Actuaries Department
Income in RetirementWEALTH
Pensioner incomes, by age
£143 £144 £149
£114 £105 £76
£13£61 £59£42
£63 £49
£0
£50
£100
£150
£200
£250
£300
£350
£400
£450
Recently retired Under 75s Over 75s
Earnings
Investments
Occ pen income
Benefits
Source: Department of Social Security (2001) Pensioners’ Income Series, 1999-2000
Home OwnershipWEALTH
Percentage of people owning their own home, by age
12% 16%29%
43%58%
65% 63% 58%41% 56%
62% 61%59%
48%32%
16% 3%
9%7%6%
8%8%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
<30 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75+
With Mortgage
Outright
Source: NOP, Financial Research Survey, 2000
.......and its problemsLONGEVITY HAS ITS BENEFITS
All financial services brochures for the silver market show happy attractive old people - we all want to live longer
‘Silver market’ is expanding………..
Insurers run significant extra risks on their new and existing business
Reinsurers are keen to selectively expand into this large market by assisting their clients
WHICH RISKS ARE PROVIDERS FACING?
We are living longer - but not necessarily in a healthy state
We will work, and need income protection, for longer
People will need life assurance at older ages
Annuitants are already living longer and will continue to do so
Impaired annuity market will grow
The need for long term care will be greater
PROVIDERS FACE EXTENDED RISKS FOR:
Income protection
Life assurance
Critical Illness
Annuities
Impaired annuities
Long term care
Life AssuranceNEW RISKS FOR INSURERS
Improving longevity is good news for existing block!
More demand from older lives– People have children older
– Inheritance tax, demand up to age 90 or longer
– Retirement age to increase?
– Demand for higher ages at entry
– Little data available
Reinsurers have mortality studies from around the world and have written such business in specialist areas
Mortality continuing to improve……
……….…..but already priced in?
Rates close to bottom?
Life AssuranceNEW RISKS FOR INSURERS
The Annuity MarketIMPROVED LONGEVITY HAS ITS RISKS
Existing blocks - improvements greater then expected
New business - how much further will mortality improve?
How much have rates changed - due to improved longevity?– Male 65, £100,000 purchase price in 1991: £9,455pa
– Male 65, £100,000 purchase price today : £8,511pa
– Reduction in annuity: 10%
Can reinsurance help?
Will reinsurers help?REASSURANCE AND ANNUITIES
Reinsurers know about mortality, but most of us are reluctant to take longevity risk from existing blocks
Why?– Life insurer has margins in investment and expenses
– Everyone worried about the scale of future improvements - including the reinsurers
– A large possible downside for little upside!
So where can we help in this market?
A growing marketIMPAIRED ANNUITIES
We are keen to provide support to clients for impaired annuities, why?
The market is relatively new and growing
Opportunities for innovative product development
Underwriting and mortality pricing are our key strengths
Risk can be high, so insurers keen to pass risk on
Potential upside is higher - in relation to downside
Key questions for reinsurers and providersIMPAIRED ANNUITIES
Which market segment?– Serious impairments
– Lifestyle impairments
– Occupation / location
What is risk profile for each impairment?
How will medical advancement affect experience?– New drugs for Alzheimer's for example
MarketsLONG TERM CARE
Two separate markets– Pre-funded
– Immediate needs
Insurers and reinsurers and tried to develop a pre-funded market in the early 90s, without success
Immediate needs market is now growing
Immediate NeedsLONG TERM CARE
Impaired annuity, with different characteristics
Older age at entry, typically aged 80 and higher
Lower expected life expectancy
No compulsion to effect annuity
REINSURANCE FOR IMMEDIATE NEEDS LTC
Underwriting at advanced ages is a difficult art
Pricing information is scarce
Potential error could be high– Living one more year causes larger proportionate loss
For shorter term annuities investment yield less significant
Reinsurance product a great benefit for providers
Role of ReinsuranceEQUITY RELEASE
Great product for the ‘silver market’
Product structure is complex ‘behind the scenes’
Product design depends on ‘expected’ longevity
Lenders require repayment based on ‘expected’ deaths
Reinsurance product can swap ‘expected’ for ‘actual’
Research
Pricing
Underwriting
Product design
Ongoing advice
Fits very well with our skills and services brought to a long term client partnership
Reinsurance Services RequiredTHE SILVER MARKET
SOCIAL POLICY
To underwrite and price for the elderly we must consider a wider social view
Government and social policy will be a major influence
Current elderly population are not high priority for government
What will happen as elderly population becomes more affluent?
Our Healthier NationGOVERNMENT INITIATIVES
Priority areas are:– Heart disease and stroke
– Accidents
– Cancer
– Mental health
Aim to reduce death rates
Targetted at working population - up to 65
IMPLICATIONS OF GOVERNMENT POLICY
As initiatives work, there will be knock on effect to older ages
Improving mortality will continue into old age
We will view people with minor impairments as ‘standard’
Those disease free will be ‘super preferred’
Major implications for annuity market, especially with growth of impaired products
AVAILABILITY OF TREATMENT
Availability of diagnosis and treatment for older lives will be key
As our generation ages, we will demand the best care - and many of us will be able to pay for it
We won’t accept priority given to younger lives
More treatment will be given to elderly lives
Underwriting will become even more specialised
Life expectancy for men was 45 in 1901 and is projected to be 84 in 2011 (GAD 1998 population projections)
Medical science has advanced substantially in the 20th century
Still developing very fast
Of specific interest to the life assurance and health industry:– New diagnostic techniques– New screening programmes
May improve mortality - but what about morbidity?
MEDICAL ADVANCEMENT
SPECIFIC DEVELOPMENTS
Improvements in treatment of hypertension have already benefited incidence of heart attack and strokes
Screening initiatives– Cervical screening
– Prostate cancer
Prostate Cancer Ratio of Population Incidence Rates in Calendar Year
to 1979
60%
80%
100%
120%
140%
160%
180%
200%
220%
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
45-5455-6465-74
New Screening ProgramsEXAMPLE
Prostate Cancer
Screening programme now proposed– 2 year trial launched April 2001– 230,000 men between 50-69 invited to attend for check
Sweden has had a full screening programme for some time– They have one of the highest incidence rates of prostate cancer
in the world
New screening programmesEXAMPLE
Many more cases of prostate cancer detected
Average age of detection will reduce
Diagnosis before disease is life threatening
Cases which would have gone undetected will be found
Mortality rates will improve, morbidity rates will worsen
Possible effects of successful screeningPROSTATE CANCER
US Age Standardised Population Incidence Rates as a Percentage of Rates in 1973
0%
50%100%
150%
200%
250%300%
350%
400%450%
500%
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
Less than 65
More than 65
Prostate cancerCRITICAL ILLNESS
Early detection system for lung cancer
Early use of MRI scans for Multiple Sclerosis
Memory assessment testing for Dementia
MRI screening to detect silent stroke
Full body scanning
Genetic screening by GPs in general practice
POSSIBLE FUTURE DEVELOPMENTS
Developments point to improving mortality
Are these improvements already priced in?
If so term rates could be close to bottom
Critical Illness rates set to increase at older ages– Especially if definitions not updated– Guarantees to become more expensive, if available
Other health products to become more expensive at older ages
Life and HealthPRICING
AnnuitiesPRICING
More players will enter the impaired annuity market
‘Own mortality table’ pricing by reinsurers
Segmentation of annuity market resulting in lower standard rates
More criticism of annuities?
Further product development
UNDERWRITING THE SILVER MARKET
No ‘clean’ proposals at older ages
How do diseases interact?
Underwriting decision for a disease may vary by product
For example, diabetes:– In middle age insurable for life assurance (with rating)
– May not be insurable for health assurance
– In old age the survivors may be ordinary rates
Medical science will continue its relentless advancement
As a result mortality will continue to improve at the middle and advanced ages
Demand for health insurance will grow in these age groups
Product designs in both the health and annuity areas will change
Interaction between product development actuaries and underwriters will become ever more important
Risks run by life insurers and reinsurers will need careful and close monitoring
Some speculationSUMMARY
SummaryTHE SILVER MARKET
Large potential for growth in risk products
Pricing and underwriting are major challenges
Reinsurers will continue to research this growing market and provide their clients with competitive advantage
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