Swiss Re says time is running out for effective longevity funding solutions and calls for a multi-stakeholder approach to address longevity risk

31 August 2010

Swiss Re today publishes its report “A short guide to longer lives: Longevity funding issues and potential solutions”. The report warns that underestimating life expectancy by just one year can increase a pension plan's liabilities by up to 5%. It examines what (re)insurers and other parties can do to help address the challenges faced by societies as a result of increased life expectancy. The report also includes recommendations for the key parties involved in addressing longevity funding issues.

Over recent years, people’s life expectancy has risen substantially and this trend is likely to continue. Swiss Re’s report looks at what governments, pension plans, insurers and reinsurers can do to help address the challenges faced by societies as a result of increased life expectancy.

Christian Mumenthaler, Head of Life & Health Products and member of Swiss Re’s Group Management Board, says: "While life expectancy is on the increase, the time required for implementing effective longevity funding solutions is running out. Insurers, governments and pension providers must act now to ensure that living longer remains a benefit to society, rather than a financial burden."

Insurers and pension funds have an obligation to pay and reserve for accumulated pension benefits. Underestimating life expectancy by just one year –a relatively small miscalculation – can increase liabilities by up to 5%. So, for a pension plan with USD 1 billion of liabilities, an extra USD 50 million would need to be funded.

UK longevity market most developed

While the trend towards longer lives is global, some markets are impacted to a greater degree from a funding point of view. Though currently most developed in the UK, longevity insurance activity is expected to develop in a number of markets, including the Netherlands, the US and Switzerland – countries with material exposures and a high level of private pension provision.

Well-diversified (re)insurers are a natural home for longevity risk

A well-diversified (re) insurer will have a combination of mortality risk and longevity risk along with other non-correlated insurance perils, such as property and casualty. This type of diversification means insurers are often the ‘natural home’ for longevity risk. The recent development of insurance-based (or “indemnity”) solutions are an important factor in transferring longevity risk to these natural holders.

Recommendations for the parties involved:

• Employers and pension plan trustees should assess whether they are reserving for longevity at an appropriate level and examine the feasibility of transferring some, or all, of the risk.
• The insurance industry must encourage the development of more sophisticated risk models that recognise potential future longevity trends, especially in light of Solvency II and similar regulatory initiatives.
• Governments and regulators need to consider re-aligning retirement ages with life expectancy and implement consistent regulation and accountancy guidelines. Additionally, governments should look to public-private partnerships to address their own longevity exposure through defined benefit schemes, which are backed by the state. Governments should also support the development of a longevity capital market through the publication of reliable, consistent mortality data to allow the production of transparent and robust indices. Annuity providers will need additional longevity capacity in the longer term and the capital markets may be able to provide some of this.

To find out more and download the report go to: www.swissre.com/longevity

 

Notes to editors

Swiss Re

Swiss Re is a leading and highly diversified global reinsurer. The company operates through offices in more than 20 countries. Founded in Zurich, Switzerland, in 1863, Swiss Re offers financial services products that enable risk-taking essential to enterprise and progress. The company’s traditional reinsurance products and related services for property and casualty, as well as the life and health business are complemented by insurance-based corporate finance solutions and supplementary services for comprehensive risk management. Swiss Re is rated “A+“ by Standard & Poor’s, “A1” by Moody’s and “A” by A.M. Best.