Challenges of Longevity Risks UK Perspective

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Challenges of Longevity RisksUK Perspective

• Bob Howe
• Swiss RE

ReFocus 2008 March 4
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Who carries longevity risk

• Through compulsory annuitisation of pension
  savings UK insurers had acquired 100bn of
  immediate annuity exposure by end 2005
• UK corporates have an estimated 1000bn of
  exposure for similar risk
• Identify the insurance companies!

Data from LCP accounting for Pensions 2007 sum of
pension fund assets plus deficit, UK FSA
returns. LG and Aviva show combined annuity and
pension exposure
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Longevity improvements in UKSpectrum of future
projections

• UK Insurance companies have a good understanding
  of longevity risk. There is, however, a wide
  range of opinion about what will happen in future
  as people age further.

Year
70
90
50
Age
source ONS, CMI
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Market Activity

• Active trading in UK between Insurers and
  Reinsurers who both have similar views about
  mortality
• Very little trade with Pension Funds who have, to
  date, underestimated mortality improvement
• Limited trading outside UK since Insurers
  generally not willing to trade at Reinsurers
  prices
• Likely future developments will involve financial
  markets e.g. longevity index trading or double
  trigger solutions (combined assets and longevity)

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Improving market opportunities with Pension Funds

• Insurance companies have strengthened reserves
  because of industry data and mandatory stress
  testing
• Until end of 2005 minimum funding requirements
  for Pension Funds essentially met on a life
  expectancy of 16 years at age 65
• Some small changes made by Pension Funds since
  then, but now a clear signal from Pension
  regulator that something close to 24 years is
  expected
• Sponsors much more aware of risks in Pension
  schemes. As they have come to understand asset
  risk, they now discover longevity risk!
• As historical deficits are bought under control
  we expect a lot more activity as Pension Fund
  sponsors seek to manage/mitigate/transfer risk.
  Already a few small transactions

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Market segmentation provides opportunity
source ONS
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Improving Longevity not just a UK issue
Male Life expectancy at age 65 continues to
increase at close to 2 months a year across much
of the developed world.
source www.mortality.org
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Future uncertainty requires risk capital
1st percentile
90th percentile
99th percentile