A forward-thinking approach to predicting longevity

A Swiss Re report suggests that models predicting life expectancy should become more sophisticated to help manage the financial risks associated with ageing populations.

In the report, "A window into the future: Understanding and predicting longevity", Swiss Re says that the good news that people are living longer has brought with it substantial financial problems throughout much of the world.

One of the reasons behind the funding difficulties is that historical projections of future mortality have failed to take account of important developments in medicine and society. This has caused employer pension plans to under-reserve and governments to budget inadequately for people's retirement income.

Building better models

The report states that a disease-centred mortality model, based on forward-looking scenarios, can play a key role in the evaluation of longevity risk. This would involve an improved understanding of potential developments in social factors, medical treatments and preventative approaches to tackle disease.

An effect of these improved models would be insurers and reinsurers working together to manage their customers' longevity risk more effectively. Reinsurers investing in their research and development capabilities will be important as insurers look to address regulatory requirements, including Europe's Solvency II.

Not a panacea

Although improved modelling capabilities will help manage longevity risk, it will not eliminate it. The report recommends that employer pension plans should assess their exposure to this long-term risk and decide whether it is best to retain it or pass some, or all, of it onto a third party.

"A predictive, forward-looking mortality model is just one of many essential components in creating an overall solution," explains Alison Martin, Head of Life & Health Products. "Governments, employers and the insurance industry should work together towards a long-term, sustainable infrastructure for retirement provision, including the sharing of longevity risk."

Published 1 September 2011

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