1 Ralf Jacob: Pressing pension issues facing the continent THE 3 … · 1_Ralf Jacob: Pressing pension issues facing the continent 3_Pierre-Alain Boscher: The social cover of French

THEEUROPEAN ACTUARY

1_Ralf Jacob: Pressing pension issues facing the continent 3_Pierre-Alain Boscher: The social cover of French employees 4_Klaus Heubeck: 125 Years German Bismarck Social Security System 5_Peter Tompkins: Choosing how to take your pension 6_Ad Kok: The New Global Insurance Capital Standard 8_Falco Valkenburg: Being honest about pensions 10_Tim Rozar: Working together at aging populations

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Pressing pension issues facing the continent with good coverage rates, in a minority of EUmember states. Third pillar products areavailable almost everywhere, but their uptakevaries greatly, depending in particular on thepublic support that is available for this kind ofsavings and on how much people trust suchpersonal pension plans.’

Which member states are performing best?

‘A few are doing quite well: they have alreadyachieved high employment rates and a goodcoverage of supplementary retirement savingsschemes. I am thinking of Sweden, Denmarkand the Netherlands. For the vast majority ofmember states, there is significant potential forimprovement in both respects. This also meansthat there is greater untapped employmentgrowth potential, which can compensate forshrinking working age populations. Likewise,there are many possibilities for increasingcomplementary retirement savings. Indeedprogress is possible even in the current difficulteconomic climate: employment rates of olderworkers increased during the recession. And thecoverage of supplementary pension schemescan quickly be expanded through auto-enrolment - as in the UK - or through collectivebargaining to establish industry-wide coverage ofoccupational schemes; this has been veryeffective in the Netherlands, Denmark andSweden and more recently in Belgium.’

1T H E E U R O P EA N A C T U A RY _ V O L . 4 N R . 2 _ A P R 2 0 1 4

By David Nicholson

Can Europe's pension systems cope with the

challenges of an ageing population?

‘I think there is a lack of confidence in pensionschemes, be they public or private. Both types ofschemes, in view of the current economic climate andthe ongoing demographic changes, will be performingless well in terms of what amount of pensions peoplewill get for their contributions. But that doesn't meanthat today's pensioners will be the last to enjoy adecent income in retirement. In February 2012, theCommission presented a White Paper on adequate,safe and sustainable pensions. It set out how MemberStates can ensure that future generations can enjoygood pensions, focusing on two key ways to tackle thechallenges: achieving a better balance between yearsspent working and years spent in retirement, andpromoting safe and cost-effective private pensionschemes. People will need to work longer and retirelater, but there is also scope to raise young people andwomen’s employment prospects, easing the transitionfrom education into employment and achieving abetter work and life balance. Good pensions dependon long stable careers in high-quality full-time jobs.This is what provides the foundation of strong pensionsystems.’

What is the outlook regarding supplementary private

savings?

‘There is also ample room for improvement.Occupational pension schemes are well developed,

Ralf Jacob

2 T H E E U R O P EA N A C T U A RY _ V O L . 4 N R . 2 _ A P R 2 0 1 4

What role can the EU play?

‘Pension provision remains a responsibility of member states. But thereare issues which need to be regulated at European Union level, notablyrelated to the Internal Market. The EU is more and more active incoordinating national economic and social policies. The White Paper onpensions presented a number of EU initiatives to help member statesalign their policies with the priorities for adequate, safe and sustainablepensions. Only a few of these initiatives are legislative, linked to theinternal market. Recently we reached agreement on a Directive thatseeks to reduce obstacles to free movement by ensuring that people canacquire occupational rights after no more than three years ofemployment, and that these rights are preserved in a fair manner, so thatpeople are not penalised too much when they take a job in anothercountry. Another legislative initiative concerns the revision of the 2003directive on institutions for occupational retirement provision – pensionfunds, in other words.’

How does the ‘European Semester’ affect pensions?

‘When it comes to achieving a better balance between work andretirement the 'European Semester' is a powerful new tool. This is areview of economic, employment and social policies that has taken placeduring the first half of each year since 2011. At the end of this process,recommendations are addressed to the member states. Many of theseconcern pension reforms. For example, recommendations have focusedon the need to raise the effective retirement age by restricting earlyretirement, raising the pensionable age and linking it to life expectancy.Importantly, they have also highlighted changes in work place and labourmarket practices, to allow women and men to work longer. Memberstates can get financial support to implement these changes from theEuropean Social Fund. Finally member states can draw upon advice andsupport from the EU's Employment and Social Protection Committees.’

Should the EU encourage a direct link between pension age and life

expectancy?

‘As life expectancy goes up – thanks to reduced mortality above theretirement age – we will spend a greater proportion of our life inretirement, unless the retirement age is adjusted in line with lifeexpectancy. The Commission has therefore pushed member states tolink the age at which people can claim a pension to life expectancy. Thiswould improve the financial sustainability of pension systems withouthaving to cut benefits. However, member states wanted more flexibilityand insisted that a link between the pensionable age and benefit levels –at a given retirement age – should also be regarded as an acceptableway to secure financial sustainability. Life expectancy is, for instance,used in the calculation of benefits in countries like Sweden, Portugal andFinland. No matter what linkage between the pension system and lifeexpectancy is used, adequate pensions in the future depend on thesemeasures bringing about a rise in the effective retirement age, i.e. theaverage age at which people drop out of the labour market.’

With low interest rates expected to persist, are annuities likely to

disappear?

‘With low interest rates, and, more generally, low rates of return onfinancial assets, people need to save more to achieve their desired levelof supplementary retirement income. Moreover, with the decline ofdefined benefit schemes, most people will only accumulate capital andwill have to bear the risk of low annuity rates when they convert theircapital into a regular income. If they don’t choose this option, they willhave bear the risk of outliving the amount of savings they haveaccumulated. From a social policy perspective, it would be mostdesirable that people take annuities. But for that to happen, we needattractive annuity products, and designing them will be a majorchallenge for actuaries. Of course, policy makers can also makeannuitisation mandatory or give strong financial incentives to annuitise.’

How do you see the Actuarial Association of Europe developing?

‘The Actuarial Association of Europe has been an important partner ofthe Commission for a long time. I am thinking in particular of its role as amember of the European Pensions Forum where we are currentlyworking on a code of good practice for occupational pension schemesand where, in the future, we should look at the implementation of thedirective on acquisition and preservation of supplementary pensionrights, and at fair treatment of preserved, or dormant, pension rights.We, in the Commission, are also very interested in developing the fruitfuldialogue on pension statements, tracking individual pension entitlementsand on assessing the future sustainability and adequacy of pensionsystems. The expertise of the Actuarial Association of Europe could alsobe most useful when it comes to developing and promoting cost-effective ways of transforming assets into retirement incomes.’

Ralf Jacob works at the European Commission, DG Employment, and isHead of Unit for Active Ageing, Pensions and Healthcare


By Pierre-Alain Boscher

The signing of the National Inter-professional Agreement (ANI), onthe 1st of November 2013 was abolt from the blue for the Frenchinsurance market players. Thishistorical agreement betweensocial partners (employees’ andemployers’ representatives)provides among other measuresthe generalization of a collectivemandatory occupationalsupplementary health cover for allFrench employees by 1st January2016. By this date, all Frenchemployees will be compulsorilycovered by a complementaryhealth insurance contractproviding a minimum level ofguarantees with the employerbearing at least 50% of the totalcost. Given the fact that the basic1st Pillar scheme (Social Security

The generalization of a collective mandatory occupational supplementary health cover

for all French employees

THE SOCIAL COVER OF FRENCHSALARIED EMPLOYEES

health branch) takes charge of thefirst level of healthcare feesreimbursement, this new provisionsupplements the social cover ofsalaried employees in France.

It should be noted that 60% ofsalaried employees are alreadycovered by collectivesupplementary health covers,partly financed by their company.The 40% of employees directlyconcerned by this agreement, for amajority of them, are alreadyindividually covered by aninsurance company. As a matter offact, the French health insurancemarket prepares itself for amassive transfer from individual tocollective contracts. This will befelt like a tsunami for some marketplayers. Players in the Frenchhealth insurance market are ofthree kinds: individual cover

specialists, collective coverspecialists and generalists(offering both individual andcollective covers). The directconsequence of the ANI will be thetransfer of the insured and theircontributions from individual coverspecialists to the two other types ofhealth market players. The futurelooks obviously dark for a certainnumber of health players andseveral reactions have alreadybeen observed, aiming atdiversifying their market positionor approaching generalist insurersto link with them.

Furthermore, individual contractportfolios should at term retain twotypes of insured: self-employedand retired persons. A questionmark still remains concerningthese portfolios’ financialsustainability since theirdemographic profile will beaffected and also because the costof their risk will face a quickincrease. It is therefore veryimportant for insurers to anticipatethese effects and to take thenecessary actions in terms ofcontribution levels as well asguarantees provided.

The new need for employees to getcovered also whets the appetite ofinsurers that are little or notpresent in the supplementaryhealth insurance market. In thiscontext, the “bancassureurs”(insurance companies beingsubsidiaries of banks) could makethe number of competitors growand also disrupt the current orderin terms of market sharedistribution.

Given the French socialenvironment, the calendar of thegeneralization of this mandatoryhealth covers for all salariedemployees is structured in threesteps:

- The first one consists of leaving the choice to each professionalactivity branch to negotiate forthe implementation of a healthprocedure which would bespecific for all the companies ofthe branch (deadline: 30th June2014);

- The second one corresponds to the negotiation window insidethe companies between theemployer and the employees’representatives;

- The third one states that employers must have coveredtheir employees by 1st January2016, assuming that both step 1and 2 have not come to asuccessful outcome.

In the course of 2013, the firststep was the object of manyquarrels, involving the market’sdifferent players, the governmentand the two assemblies. Indeed,an old French practice allowed anyprofessional branch until then, todesignate an insurer with which allthe companies from the branchhad to be affiliated. As aconsequence, some players werebenefiting from a privileged anddominant position in the market.This process has been judged inspring 2013 anti-competitive andat the end of 2013,unconstitutional.

Bottom line, the French insurancemarket is strongly affected by thisnew compulsory health insurance,which is a unique featurecompared with other Europeancountries and which should deeplymodify the players’ scene, themarket practices and the insuredpersons health consumptionmode.

Pierre-Alain Boscher is WorkmenCompensation Director atOptimind Winter

Pierre-Alain Boscher


also the state. So this general caresystem primarily followed theinsurance principle, supplementedwith some social elements in termsof payments and financing.

Financing

Then as now, the overall financingof the annually paid out pensionbenefits was achieved throughsharing the costs of need amongall the pay-as-you-go contributorsinsured in the general system (thefirst pillar). The level ofcontributions for individualsresulted from an overallcontribution rate and theirpersonal earned income, wages orsalary, up to a contributionassessment ceiling (CAC). Thecontribution rate today is at almost20% and the CAC is at almost€6,000 per month. Today, after 40years or more as a full contributorto the system, this results in old-age pensions of around 40 to 45%of the final gross salary.

Alongside the financing throughcontributions by the insuredparties, subsidies from the stateand a certain capital accumulationhave always played a role, albeit arapidly changing one. The basicprinciples of the Bismarck systemof old-age provision havefunctioned with interruptionsthroughout our changing history.They have contributed to the factthat we still have a functioning,relatively strong and fair socialpension insurance system in

Germany today – and this after twoworld wars, the economic crisesand reunification.

The Pension Reform of 1957 and

Afterwards

The foundations for the systemtoday were created 57 years ago in1957 or rather, they werereinstated. The German FederalChancellor, Adenauer, wanted towin the upcoming election andintroduced the system of the “fullyindex-linked pension”. Politicianspaid no attention to the actuaries’objections, – that the level ofpensions anticipated in this systemcould not be financed in themedium term via the pay-as-you-go process – neither in the nearfuture nor in the subsequentdecades.

As a result, the work of pensionactuaries has concentrated onexisting and newly developedoccupational pension systems.The financing of these schemesthrough external accumulation ofcapital (as pension funds mostly)or tying up capital in house (asbook reserve systems) has beenproviding them with a broad fieldof activity.

Admittedly, the necessarydevelopment of the occupationalpension system has not comeabout in the decades since the1957 reform. Yet, with the help ofthe actuaries, these systems couldbe put on a solid basis, made

125 YEARS OF THE GERMANBISMARCK SOCIAL SECURITY SYSTEMBy Klaus Heubeck

Let’s imagine a worker who was born in 1880. In 1895, at the beginning of his

working life, he was registered in Bismarck’s social security system and consequently

insured against illness and disability. He and his wife, who survived him, would

receive lifelong pension benefits and, if they succeeded in thwarting the mortality

tables, they would be able to benefit from comparable benefits from the statutory

state pension fund today.

Klaus HeubeckBismarck's social security systemwas originally a reaction to aproblem that came along with theindustrial revolution. With thesharp increase in the number ofworkers in the new industries andin the cities, care in cases ofillness, of death, disability or oldage could no longer be providedby families or village communities.The systems of provision in somelarge industrial enterprises which,in isolated cases, had alreadybeen set up early in the 19thcentury, did not have the strengthand reliability to provide safeguardagainst poverty and misery amonga rapidly growing workforce.

Benefits

As well as a general healthinsurance system, Bismarck alsointroduced a comprehensive old-age pension scheme. This firstpaid out in cases of employeedisability and, upon death, to anysurviving dependants. Some yearslater, with the introduction of astatutory age limit of 65 aseparation was made between riskprotection in working life andguaranteed old age provision.

The level of the respective pensionbenefits often resulted from theamount and duration of earningsof the individual employee, withdifferences between blue-collaremployees and white-collaremployees – with financialcontributions made by theemployer and, to a certain degree,


capable of development and fit forthe future. A constant challengeuntil today has been to protect thesecond pillar from often insensitivedomestic and European politicalinterference.

The Current Situation

About 15 years ago in Germany,efforts were begun to guarantee allemployees extensive old-ageprovision that would safeguardtheir standard of living afterretirement. This significant reformin old-age provision was known asthe Riester reform and was set upon the basis of existing systems.The first pillar, with its pay-as-you-go financing – the level of whichhas been sinking and is forecast tosink further – is to be supportedand supplemented by the secondand third pillars and their capitalaccumulation-based pensionplans. This has not been entirelysuccessful so far. Turbulence inthe capital markets as well as theshort-term focus of governmentpolicy make it doubtful whether wewill achieve an efficient andcomplete system of general old-age provision for all employees inGermany in the foreseeable future.In terms of cost sharing andfunding (pay-as-you-go financingwithin the state pension schemeand capitalisation in theoccupational pension systems) thiscould and should be at a ratio ofaround 2 to 1 and, as a result,should be able to provide apension level for the employee of60 to 65% of final earnings after afull working life. But the path toachieve this is still a long andstony one.

Prof. Dr Klaus Heubeck isfounding and long-time Boardmember of the German Institute ofPension Actuaries IVS and theGerman Association of ActuariesDAV

By Peter Tompkins

In the United Kingdom, the Government

has just (March 2014) announced that

people will no longer have any

obligation to turn their pension funds

into annuities when they take their

benefits. This announcement not

surprisingly caused a collapse in the

stock market values of a number of

companies which make their living

selling annuities.

The UK has a three pillar pensionsystem consisting of Statepensions currently paid from 65but rising to 68 over the next fewdecades. The second pillar is thebenefit provided by employers,sometimes as defined benefits butalso increasingly as definedcontributions. The final pillar is thevoluntary provision which is alwaysmade on a defined contributionbasis and used to come with theneed to buy an annuity. It is thiswhich the Government is tochange.

People will have to pay tax on anymoney they take out of theirpension but many people areexpected to take the taxed moneyand invest it in their own way, suchas buying property to rent andgenerate an income. Some peoplemay want to spend the new moneyon a dream holiday or some majorwork on their home. Inevitablythere is a lot of speculation aboutwhat is best for people.

Actuaries will need to take muchmore time, either individually orthrough the large insurancecompanies, explaining the optionspeople now have. For some peoplean annuity guaranteeing anincome for life will continue to be asensible option. The challenge isto explain this to a doubtful public,who may now be keener on all thenew choices they have. The nextfew years may prove to be veryinteresting to anyone working inthis area.

Peter Tompkins is a UK pensionsactuary and a member of theEditorial Board of The EuropeanActuary.

A pension, an annuity or alump sum – your choice?

Peter Tompkins


By Ad Kok

Gabriel Bernardino, chair of theEuropean Insurance andOccupational Pensions Authority(EIOPA), made the keynote speechin which he emphasised the needfor global capital standards as they“prevent regulatory arbitrage,increase financial stability,guarantee a level playing field andstrengthen supervisorycoordination”. But in order toachieve that “it is necessary tohave a clear understanding of theobjectives and who is going todrive it”.

He called it a very ambitiouscommitment for the IAIS to deliverthe global supervisory standardsand said that it required the IAIS“to make some organisational andgovernance improvements, inorder to increase effectiveness”.Bernardino would be in favour of“keeping the Basic CapitalRequirement (BCR) simple andstraightforward” and expected “itwould be somewhere between theMinimum Capital Requirementand Solvency Capital Requirementin Solvency II”. In developing theBCR “too much granularity,complexity and risk sensitivityshould be avoided”. The EIOPAchairman was convinced that “thebasic sound principles of SolvencyII will be applied internationally”.

Bernardino’s speech was followedby a panel discussion, moderatedby Esko Kivisaari, chairperson ofthe AAE Insurance Committee.Panel members includedCatherine Lezon (IAIS), KlausWiedner (EU Commission), BartDe Smet (CEO Ageas), Marco Vet

THE NEW GLOBAL INSURA

(CRO Forum) and Michael Eves(IAA).

In the discussion that followedKlaus Wiedner expressed theCommission’s concern thatalthough they do not expect a copyof Solvency II, the new globalstandard should be equally asadvanced as Solvency II andperhaps less technical. There is astrong preference for a scenariobased model and not a factorbased model to avoid going backto a Solvency I level.

The industry view, as expressed byMarco Vet, is overall supportive ofthe direction taken but urges thatthe new system should fit in andbe complementary to existingadvanced and well tested systemslike Solvency II thus preventing anew layer of supervision. Theframework should be sufficientlyflexible to support existingsupervisory systems and avoidbeing too prescriptive by settingdetailed requirements. The effortin time and resources spent by theindustry to comply with existingsystems should not be undone byhaving a different approach.Michael Eves explained the waythe IAA is already supporting IAISby giving actuarial advice on aprofessional, unbiased basis. Thefirst basis for BCR should be aneconomic balance sheet with bestestimates for liabilities andappropriate valuation of assets.The question remains what anunbiased best or current estimateis? How to know, when comparingcompanies, they are usingsomething equivalent? To avoidgrey and subjective areas there isa need for actuaries that can

In March, the Actuarial Association of Europe (AAE) organised a seminar in Brussels

titled “The New Global Insurance Capital Standard” as a result of the announcement

on 9 October 2013 by the International Association of Insurance Supervisors (IAIS)

of the development of a risk based global insurance capital standard (ICS) by 2016.


ANCE CAPITAL STANDARD

provide independent reportssupported by a set of technicalstandards. This is already underdiscussion between IAA and IAIS.

Bart De Smet finally expressed hisloyalty to the principles underlyinga risk based system like SolvencyII as it gives management a greatinsight into the actual risk they arecarrying and also leads to goodethical behaviour. He is quitesceptical regarding the IAIS tighttimeframe and potentialunderestimation of the complexity.Taking into account the alreadyexisting large number of risk basedsystems IAIS has to be careful notto make the world too complexwhere in the end only a few peoplewill have a full overview andunderstanding. Although thestandards are aimed at globallyoperating systemic insurers it willautomatically spread to otherinternationally operating insurancecompanies.

The conclusion of the seminar wasthat we seem to be only at thebeginning of the discussion thateventually should lead to a globalinsurance capital standard. And toend with the words of GabrielBernardino, it is also clear that“the Actuarial Association ofEurope can play an important partin this evolution by sharing withthe international actuarialcommunity its experience andknowledge of how to deal witheconomic balance sheetvaluations”.

A.A.M. Kok AAG Hon FIA is ChiefExecutive at the ActuarialAssociation of Europe (AAE) Ad Kok


Being honest about pensions

Together with Solvency II for insurers and the future of the role of theactuary in general, pensions are the main focus for the ActuarialAssociation of Europe. Since the European Commission has started workon the IORP (Institutions for Occupational Retirement Provision)guideline for pension schemes, the Pension Committee has put in placeseveral new task forces and subcommittees on pensions that areinvolved with specific details of pensions.

The solvency working group of the Pension Committee is focussing onthe funding and buffers of pension schemes. The task forcedecumulation is studying the different methods to finance pensionsduring the retirement stage. The task force adequacy of pensions istrying to define what is a sufficient pension. This task force is part of thesocial security subcommittee. Although first pillar pensions are not veryoften the working field for actuaries, it is an important European issue.As are third pillar pensions. Valkenburg: ‘In many European countriespension is mostly a government matter. There is hardly a second, letalone a third pillar. But pensions in the first pillar need to be financed aswell. Actuaries specialize in these kind of calculations, so it’s good tohave an opinion on these issues.’

Tracking and tracing of pensions is another taskforce of the pensioncommittee. Its goal is to facilitate European employees to find out whatpensions they are entitled to. This is an issue gaining importance as theaverage worker has more jobs and more different pensions. Only in avery few countries it is possible to get an easy overview of all thesepensions.

The complaint that ‘Solvency is going to cost usbillions’ is just not correct.

Member states are afraid that the European Commission is aiming forharmonisation of pension schemes and therefore wants to impose

By André de Vos

‘It’s all about being honest about pensions.’ For Dutchman Falco Valkenburg

transparent communication about pensions is one of the main drivers for his long

involvement in the European discussion on pensions. Valkenburg has been the

chairperson of the Pension Committee of the AAE for the last three years. Valkenburg

is a self-employed advisor, mainly focusing on international pension issues. ‘All

European pension funds should explain clearly what they do, and act according to

what they say.’

Falco Valkenburg

The Pensions Committee of the Actuarial Association of Europe wants to be the

independent source of pensions knowledge for European policy makers. Says Falco

Valkenburg, chairman of the committee. ‘Independence is our strength.’


Solvency II-like legislation on pension funds. Countries like the UnitedKingdom, Germany and the Netherlands have taken the backseat in thediscussion. A very unproductive attitude, according to Valkenburg. ‘Thefear for Europe deciding how pension schemes should work isunnecessary. Pensions will always be a national issue. The EC wants toget a set of rules in place to judge whether a particular pension system iswell funded. Individual employees and retirees have a right to know ifthere is enough money for their pension. European rules will never affectthe national pension promises itself. The complaint that ‘Solvency isgoing to cost us billions’ is just not correct. It’s a shame that theNetherlands, England and Germany are becoming bystanders in theEuropean discussion. Their pensions knowledge and experience aremuch needed in the European debate.’

The national pension schemes in Europa are of a staggering varietywhich makes is next to impossible to compare them. ‘The holisticbalance sheet’, suggested by EIOPA (European Insurance andOccupational Pensions Authority), is trying to find a way around this.Valkenburg is charmed by the concept. ‘The holistic balance sheet is away of taking into account all the special building blocks that differentcountries use to fund their pension scheme. Because of the wide rangeof different systems, that’s an ambitious effort. However, despite what thename suggests, it’s anything but fuzzy. The holistic balance sheets triesto assess the value of things like sponsor support and pension protectionschemes, which are different in each country.’

According to Valkenburg there is a great need amongst European policymakers to have access to the specialized knowledge on pensions thatactuaries have. ‘Unlike many other parties in the European pensiondiscussion we are not favouring a particular system. We considerourselves neutral observers. Our job is to calculate whether there ismoney to pay for the pensions, regardless of the scheme that is chosenby a specific country. We can provide our actuarial knowledge of pensionschemes without lobbying. Take the aging discussion. We find that eachcountry uses different ways of calculating life expectancy. We try to makethe figures more comparable. That’s exactly why our opinion is valued bythe EC and by EIOPA.’

Twice a year the Pension Committee has official bilateral meeting meetswith EC and EIOPA. ‘But whenever EC or EIOPA wants our advice, theywill call us. And there are many informal one on one meetings on

specific issues. Of course we meet at conferences and gatherings. That’sone of the reasons the AAE moved from Oxford to Brussels. We want tobe in the thick of things, we want to be around where decisions aremade.’

Little has to be expected before the elections for theEuropean Parliament

After the quantative impact study that was completed in the middle oflast year, little progress has been made on the IORP guideline. The workhas almost come to a standstill. Although the EC was expected to comeup with further proposals on IORP this spring, Valkenburg believes thatlittle is to be expected before the elections for the European Parliamentin May. ‘The European Commission is now focussing on governance, riskmanagement and communication issues. New proposals on these issuescan be expected. That doesn’t mean that there is nothing going onregarding the quantative issues. But it’s mainly EIOPA that’s working onthese. And that’s what we’re focussing on as well.’

Even though the AAE presents itself as independent, the goals of theAAE are not without self interest. The ongoing discussion about riskmanagement affects the position of the actuary. Also, with the cominginto force of Solvency II for insurance companies there is discussion onthe position of the actuary. ‘Of course, we would have preferred that theEC would have said only AAE-educated actuaries are allowed to fulfil theactuarial position. But that was never going to happen. The time ofmedieval guilds is over. We did however manage several parts of our coresyllabus to be included in the Solvency regulation. Risk management isnow becoming a major issue, in insurance and pensions. We try our bestto make sure the position of the actuary in risk management is notoverlooked.’

Falco Valkenburg (1960) studied actuarial sciences in Amsterdam. Heworked as a consulting actuary until retirement for Towers Watson. Since2012 he is an independent advisory actuary, entrepreneur and investor.He has been active within the Actuarial Association of Europe since1999. Valkenburg is chairperson of the Pension Committee. Before thathe chaired the Investment and Financial Risk Committee. Valkenburg ismarried and has two children.


AGING POPULATIONS: HOW THE INSURANCE INDUSTRY By Tim Rozar

Humans have an extraordinary capacity

for solving big problems – and creating

new ones. For centuries, futurists

predicted that human population growth

would be constrained by eventual famine

and disease. Technological advances in

agricultural efficiency, sanitation,

medicine and industrial productivity have

mitigated the anticipated apocalypse of

overpopulation, but increased life

expectancy and decreased birth rates

have introduced a new societal challenge:

rapidly aging populations. Long life

expectancies and low fertility rates are

conspiring to dramatically alter the

European age structure and invert a once

economically sustaining population

pyramid. More broadly, population aging

is a reality in every region of the world,

creating diverse challenges and

opportunities.

Global Implications and Desirable Outcomes

Increases in global life expectancy are among society’s great collectiveachievements. Likewise, expanded economic prosperity and opportunityhave been correlated with decreases in the number of children born perwoman. The net impact of these positive factors, however, is anincreasing proportion of populations at advanced ages, which createssocietal challenges.

There are two fundamental approaches to addressing the issue of agingpopulations. One approach is to focus on the causes, whichgovernments directly influence through childbirth incentives orimmigration policy. These initiatives may alter the shape of an individualcountry’s population pyramid, but they fail to deal with the universalneeds of the elderly: financial security and improved quality of life. Thegoal of this article therefore is to focus on the consequences of agingpopulations. Within this context there are two primary variables that theinsurance industry and governments can collaboratively influence toaddress the needs of an older population: the level of financialpreparedness of retirees, and the duration of healthy, independent livingin later life.

Recommendations for Collaboration

While the roles of government and industry are distinct, there are manyopportunities for collaboration to favorably influence financialpreparedness throughout older ages and increase the duration of healthylongevity.

1) Product Innovation

Governments and the insurance industry must collaborate to

develop novel financial products customized to the needs of the

older age market.

The insurance industry should serve as the innovation engine for thedevelopment of new products and services to protect the financialsecurity of its customers. Unfortunately, the insurance industry isnot viewed as a bastion of innovation. According to the NationalScience Foundation’s Business R&D and Innovation Survey,insurance was one of the least innovative industries. The industrymust collectively do more to focus on understanding andresponding to consumers’ retirement and protection needs.

Common-sense regulatory frameworks could facilitate innovationsthat enhance older-age financial security while still ensuring the fairtreatment of customers and protecting the solvency of the insuranceindustry.

GOVERNMENTS AND CAN WORK TOGETHER


Tim Rozar

5) Behavioral Incentives


incentivize individual responsibility in the areas of financial

planning and wellness.

The private insurance industry plays a critical role in financing asecure retirement. Governments and society benefit throughreduced dependency on social safety nets. With aging populations,it is crucial for individuals to have secure, fully-funded retirementsavings and individual protection insurance. Incentives built into government tax policy and insurance companyproduct features will help encourage behaviors that reduce theburden on social programs and future generations.

Conclusion

Rapidly aging populations create difficulties, but also excitingopportunities. Collaborations between governments and the insuranceindustry can effectuate the changes needed to ensure healthy andsecure financial futures of the elderly for generations to come.

Tim Rozar is Senior Vice President Global Research and Development atRGA Reinsurance Company

2) Consumer Education


educate citizens throughout their lives on the financial needs of

their retirement years.

Retirement security requires careful planning and a series of oftenoverwhelming financial decisions. The uncertainty and complexity ofthe risks necessitate clear, comprehensible consumer educationand guidance. This need is well-established, and many usefulinitiatives have already been developed by the insurance industryand governments. The problem is not a lack of financial education content, but rathera lack of effectiveness. Navigating the mountain of educationalresources may be as daunting as the financial decisions themselves.Collaborations between insurance companies, industry groups andgovernments should focus on integrating the best practices fromexisting resources and increasing awareness and accessibility.

3) Risk-Sharing

Governments and the insurance industry must collaborate by

sharing the risks associated with providing cost-effective wealth

protection for retirees.

A competitive private insurance industry provides attractively-pricedcoverage by segmenting and rating applicants based on their riskprofiles. While this arrangement helps keep costs reasonable for amajority of potential insureds, it creates an unaffordable product forthe highest-risk cohorts. Minimum compulsory coverage againstspecific risks such as hospitalization, disability, nursing care anddeath, could help mitigate the economic costs of adverse selectionand reduce the strain on social programs. Government-funded high-risk pools created in partnership with the insurance industry couldhelp finance the costs of the uninsurable, while keeping coverageaffordable for the insurable majority.

4) Medical Research and Technology


support practical research initiatives that slow the progression

and reduce the costs associated with older-age diseases.

Governments and private organizations already invest heavily inmedical research, including projects focused on elderly populations.Historic increases in life expectancy provide encouraging evidenceof the efficacy of these investments. Public/private partnershipssuch as the BRAIN (Brain Research through Advancing InnovativeNeurotechnologies) initiative in the U.S. seek insights that couldlead to treatments or cures for Parkinson’s disease, Alzheimer’sdisease and other cognitive disorders.

European agenda


colophonThe European Actuary (TEA) is a bi-annual

magazine about international actuarial

developments. TEA is written for European

actuaries, financial specialists and board

members. The magazine is published in

cooperation between the four actuarial

associations: Deutsche Aktuarvereinigung,

The Institute and Faculty of Actuaries,

Het Koninklijk Actuarieel Genootschap and

the Institut des Actuaires.

It will be released as e-mail newsletter, as

well as in print. The Editorial Board welcomes

comments and reactions on this edition under

[email protected]. Please also

feel free to direct them to one of the members

of the Editorial Board.

The Editorial Board consists of

Peter van Meel

([email protected]) Pierre Miehe

([email protected])Daniel de Burca

([email protected])Peter Tompkins

([email protected])Klaus Mattar

([email protected]) Laszlo Hrabovszki

([email protected])

www.the-european-actuary.org

Lay-out Manager: Marjolein StahlMagazine Manager: Frank Thooft

Koninklijk Actuarieel Genootschap

8 May 2014, Brussels, Belgium

AAE Social Security Subcommittee

Contact: http://actuary.eu/


AAE Education Committee, AAE Investment and

Financial Risk Committee, AAE Pensions Committee


2-3 October 2014, Helsinki, Finland

AAE Committee Meetings


3 October 2014, Helsinki, Finland

AAE General Assembly



AAE Seminar and presentations by ERM/CERA

providers

Contact: http://actuary.eu

18 – 20 June 2014, Tallinn, Estonia

EAA Seminar: Actuarial Enterprise Risk Management

Contact: www.actuarial-academy.com

Documents

1 Ralf Jacob: Pressing pension issues facing the continent THE 3 … · 1_Ralf Jacob: Pressing pension issues facing the continent 3_Pierre-Alain Boscher: The social cover of French