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

Developments in the Pricing

and Underwriting of Risk

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

Panning for SilverThe Implications of an Ageing Population

Joanne WellsYounger Member Convention 2002