Annuities: a private solution to longevity risk

Transcription

1 Annuities: a private solution to longevity risk Product & Knowledge Fair 2007 Rüschlikon 30 March 2007 Thomas Hess Head of Economic Research & Consulting Veronica Scotti Client Solutions

2 Need for private solution is growing Life expectancy at birth in different regions Old-age dependency ratio* in selected countries 100 % 80 % Germany World USA Japan France UK Germany World USA Italy Japan France UK Slide 2 Source: United Nations, World Population Prospects, 2004 Revision *Ratio of the population aged 65+ to the population aged 15-64

3 The role of the insurance sector In the accumulation phase In the decumulation phase By helping individuals build up a desirle level of savings throughout their working years: By allowing individuals to run their asset pool down smoothly while offering protection against longevity and inflation: in a flexible way (in the amount and timing of their contributions to the capitalisation plan) in an efficient way (via investment diversification, gradual adjustment of the risk/return profile based on age, tax advantages) through various types of annuities through health care and longterm care insurance through wealth monetisation (eg reverse mortgage) Slide 3 through wealth transfer in the case of early death

4 Size of annuity markets Switzerland Total assets 75'896 Annuity assets 15'567 % 21% Netherlands 50' % United States 45' % United Kingdom 41' % Australia 29' % Japan 17' % Germany 10' % Italy 6' % 0 20'000 40'000 60'000 80'000 (USD per capita, 2004 data) Assets for Pension Funds Assets for Life Insurers of which: backing annuities Slide 4 Source: OECD Global Pension Statistics; OECD Insurance Statistic Yearbook; insurance associationsof represented countries

5 Total pension expenditure in % of GDP 14% 12% 10% 8% 6% 4% 2% 0% Public Ireland Private New Zealand Australia Canada Spain Netherlands USA UK Germany France Slide 5 Source: Report of the Pensions (Turner Commission), 2005; OECD, 2004, Social Expenditure Datase ( ) Note: Data was not availle for Ireland, New Zealand and Spain

6 Slide 6 Role of pension system: Pension funds and life insurance assets penetration % of GDP / / % 140% 120% 100% 80% 56.5% 60% Voluntary 40% 20% Mandatory (year of introduction) 0% Greece Switzerland Iceland Netherlands United United States Denmark Australia Ireland Canada Sweden Finland France Japan Belgium Norway Germany Austria Italy Portugal Slovakia Spain Korea New Zealand Hungary Poland Czech Turkey

7 Main risks and costs affecting annuity profitility Insurance risks - Longevity risk - Persistency risk Financial-market risks - Interest-rate risk/ - Investment risk - Unhedged inflation risk Costs - Administration costs -Distribution costs - Capital costs Underwriting activity Investment activity Operating activity insured s buying behavior risk management prowess scope for diversification hedging instruments use product structure Slide 7

8 Longevity risk: Rectangularisation of the mortality curve Probility of surviving from one year to the other 100% 80% 60% 40% 20% 0% Age GAD UK male tle GAD UK male tle Slide 8 Source: UK GAD

9 Longevity risk: Uncertainty in demographic projections Share of population > 65 years (%) North America Latin America Africa projected actuall Southern Europe Western Europe South-East Asia China Japan Slide 9 Projection 1963 Actual 2000 World Source: IMF, World Economic Outlook (2004)

10 Longevity risk: Projections errors grow with time span Absolute projection error (mean values) 0.20% 0.15% 0.10% 0.05% 0.00% Projection length (years) Slide 10 Source: IMF, World Economic Outlook (2004)

11 Interest rate risk: Guaranteed rates vs. market yields % Jan 90 Jan 92 Jan 94 Jan 96 Jan 98 Jan 00 Jan 02 Jan 04 Jan LT Govt bond yield Guaranteed Rate DAX (rhs) Slide 11

12 Managing longevity risk: The role of different players Insured longevity risk Diversification State Insurers Diversification Pricing/ product design Education / distribution Risk sorption Reinsurers Risk sorption U/w support Capital management Slide 12 Capital Markets Risk transfer Hedging instruments