Longevity Risk Management and the Development of a Life Annuity Market in Australia John Evans and Michael Sherris Australian School of Business University of New South Wales Sydney, NSW, Australia, 2052

1
Longevity Risk Management and the Development of
a Life Annuity Market in AustraliaJohn Evans
and Michael SherrisAustralian School of
BusinessUniversity of New South WalesSydney,
NSW, Australia, 2052
2
Introduction

• Products and Markets Annuities, Deferred
  Annuities, Variable Annuities

• Longevity risk

3
Risk Management for Longevity Risk Products

• Investment
• Mortality
• Expenses

• Long term interest rate, inflation, credit risk
• Heterogeneity, systematic risk, reinsurance,
  hedging
• Inflation and productivity

4
Interest rate risk

• Lack of longer term government bonds
• Limited inflation linked securities
  (infrastructure)
• Equity and asset swaps or options (downside
  protection)
• Lack of liquidity

5
Longevity Risk and Pooling

• Heterogeneity
• Adverse selection
• Pooling and systematic risk
• Unknown/unknown - wars, pandemics and disease
• Solvency and credit risk

6
Longevity Risk and Pooling
Dependence significantly reduces risk pooling
efficiency
Independence risk pooling efficient

• Correlation

• No of lives

• Indexed annuity value

• 95 confidence age

• Caution Normal distribution of lifetime assumed

7
Inflation risk

• Volatility and hedging
• Product design CPI, full, fixed indexation,
  minimum, capped
• Demand and pricing

8
Role of Private Markets

• Product innovation
• Lack of hedging instruments (longevity,
  inflation, long term interest rate)
• Capital and regulatory requirements (Solvency II,
  risk based)
• Expense and efficiency
• Mutual (Industry funds, Government)
• Shareholder (Retail funds, Insurers)

9
The Role of Government

• Private Market Support
• Longevity/survivor bonds
• Inflation linked bonds
• Longevity Indices
• JP Morgan Lifemetrics
• Deutsche Bourse Xpect indices
• Australian Government Actuary (population) APRA,
  ASX (annuitants)

10
The Role of Government

• Public provision
• Immediate annuities or Deferred annuities
• Compulsory or optional
• Full, partial, minimum level
• Risk rating or community rating
• Expense efficiencies
• Costs of capital and credit risks

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Policy Options

• Private Sector develops an annuity market with
  government support to provide or organise hedging
  products for the major risks otherwise private
  sector cant supply efficiently priced lifetime
  annuities attractive to retirees.
• Public Sector annuitisation compulsory for
  compulsory accumulation SGL retirement benefits,
  purchase price reflect differing longevity risks.
• Private/Public Sector partnership a
  private/public combination with the private
  sector providing annuities for fixed terms, such
  as until age 85 or earlier death and the public
  sector providing a (compulsory) deferred annuity
  from age 85 until death.

12
Questions and Discussion

• Acknowledgements Evans and Sherris. Longevity
  Management Issues for Australia's Future Tax
  System, Commissioned Paper Australias Future Tax
  System. Working Paper http//papers.ssrn.com/sol3
  /papers.cfm?abstract_id1585563