Current approaches inadequate for assessing future longevity: robust, predictive approaches using forward-looking scenarios are needed, says Swiss Re report
01 September 2011, Zurich
The substantial increases in life expectancy witnessed in recent decades have been consistently underestimated, a new Swiss Re research report reveals. The good news that people are living longer has brought with it a massive pension shortfall, which has been exacerbated by traditional methods of forecasting longevity not taking account of certain emerging trends.
"The failure to consider future drivers of mortality in historical predictions contributed to employer pension funds under-reserving for longevity risk and other bodies, including governments, not budgeting effectively for funding an ageing population," explains Daniel Ryan, head of life and health research and development at Swiss Re.
An essential element of managing longevity risk will be the development of robust, predictive approaches, states Swiss Re's latest publication, "A window into the future: Understanding and predicting longevity." Such approaches would use forward-looking scenarios based on social factors, medical treatments and preventative approaches that influence disease.
The report presents the building blocks for this type of disease-centred model and calls on experts from multi-disciplinary backgrounds – including medical experts, actuaries and demographers – to work together towards a greater understanding of potential future developments in human longevity.
The report recommends that pension plans assess their exposure to longevity risk and decide whether to pass it on to a third party that is better equipped to take on the risk. It also suggests that insurers can work in partnership with reinsurers to develop robust approaches to mitigating longevity risk.
"An improved approach to assessing future longevity is one of the essential components in creating an overall solution to the financial effects of ageing societies. It is only through public and private bodies working together that the wider issue of a sustainable infrastructure for long-term retirement provision can be created. Reinsurers with appropriate capacity, who invest in longevity research and development, can play an important role in helping defined benefit pension funds and insurers manage their longevity risk," comments Alison Martin, Swiss Re's head of life and health products.
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Swiss Reinsurance Company Ltd
Swiss Reinsurance Company Ltd is a leading and highly diversified global reinsurer and part of the Swiss Re group of companies. 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 Reinsurance Company Ltd is rated “A+“ by Standard & Poor’s, “A1” by Moody’s and “A” by A.M. Best.
Cautionary note on forward-looking statements
Certain statements and illustrations contained herein are forward-looking. These statements and illustrations provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to a historical fact or current fact. Forward-looking statements typically are identified by words or phrases such as “anticipate“, “assume“, “believe“, “continue“, “estimate“, “expect“, “foresee“, “intend“, “may increase“ and “may fluctuate“ and similar expressions or by future or conditional verbs such as “will“, “should“, “would“ and “could“. These forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause Swiss Re’s actual results, performance, achievements or prospects to be materially different from any future results, performance, achievements or prospects expressed or implied by such statements. Such factors include, among others:
- the direct and indirect impact of the continuing deterioration in the financial markets and the efficacy of efforts to strengthen financial institutions and stabilise the credit markets and the broader financial system;
- changes in global economic conditions and the effects of the global economic downturn;
- the occurrence of other unanticipated market developments or trends;
- Swiss Re’s ability to maintain sufficient liquidity and access to capital markets, including sufficient liquidity to cover potential recapture of reinsurance agreements, early calls of debt or debt like arrangements and collateral calls under derivative contracts due to actual or perceived deterioration of Swiss Re’s financial strength;
- the effect of market conditions, including the global equity and credit markets, and the level and volatility of equity prices, interest rates, credit spreads, currency values and other market indices, on Swiss Re’s investment assets;
- changes in Swiss Re’s investment result as a result of changes in its investment policy or the changed composition of Swiss Re’s investment assets, and the impact of the timing of any such changes relative to changes in market conditions;
- uncertainties in valuing credit default swaps and other credit-related instruments;
- possible inability to realise amounts on sales of securities on Swiss Re’s balance sheet equivalent to its mark-to-market values recorded for accounting purposes;
- the outcome of tax audits, the ability to realise tax loss carry forwards and the ability to realise deferred tax assets (including by reason of the mix of earnings in a jurisdiction or deemed change of control), which could negatively impact future earnings;
- the possibility that Swiss Re’s hedging arrangements may not be effective;
- the lowering or loss of one of the financial strength or other ratings of one or more companies in the Group;
- risks associated with implementing Swiss Re’s business strategies;
- the cyclicality of the reinsurance industry;
- uncertainties in estimating reserves;
- the frequency, severity and development of insured claim events;
- acts of terrorism and acts of war;
These factors are not exhaustive. We operate in a continually changing environment and new risks emerge continually. Readers are cautioned not to place undue reliance on forward-looking statements. We undertake no obligation to publicly revise or update any forward-looking statements, whether as a result of new information, future events or otherwise.
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