Longevity a global reinsurer's perspective

Transcription

1 Longevity a global reinsurer's perspective Ilan Leas and Trevor McMahon Swiss Re Australia

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3 Agenda Australia Longevity Global Longevity DLAs

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5 Global longevity

6 Historically, longevity risk has been underestimated

7 NL improvements Projected to 2007 Source: Centraal Bureau voor de Statistiek data, Swiss Re calculation Projection from 1992, Lee Carter Model with cohort term (M3 in Lifemetrics)

8 NL improvements Actual Source: Centraal Bureau voor de Statistiek data, Swiss Re calculation

9 Improvements driven by reduction in deaths from circulatory and lung cancer Mortality rates USA Males (aged 50-84) Circulatory Lung Cancer Other Causes Source: Centers for Disease Control and Prevention, National Center for Health Statistics. Compressed Mortality File. Human Mortality database. Swiss Re calculation

10 USA Males - Smoker prevalence - attained age and birth year Male smoker prevalence Manufactured cigarettes 80% 70% 60% 50% 40% 30% 20% 10% 0% Smoking cessation key driver of mortality improvements Source: International Mortality and Smoking Statistics (IMASS)

11 6% 4% 2% Improvements are significant at post-retirement ages Male Mortality improvements by age 0% -2% US England & Wales Japan Source: lifemetrics

12 Mortality trend is systematic in nature (no diversification from volume or geography) 19 Life expectancy (males, age 65) Australia Netherlands Switzerland United Kingdom United States

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15 The global longevity risk issue is huge Global longevity exposure estimated USD 20 trillion of pension assets 90% of exposure in pension funds; 10% pension insurance contracts Insurers exposure dominated by markets with compulsory annuitization OECD Pension Assets (USD 18.6 Trillion) Other Canada Australia Japan US UK Euro area Source: OECD Global Pension Statistics

16 The holders of longevity risk Government State pension; public sector pensions; long-term and medical care Insurance industry Annuity portfolios Longevity swaps Long-term care Individual Risk of outliving their assets Employer Defined benefit pensions; retiree medical benefits

17 Mortality risk as a hedge for longevity risk? Typical buyers of life products 60 Typical buyers of life products Typical age distribution of pension fund Typical age distribution of pension fund Ag e Mortality Exposure Longevity Exposure Net Exposure

18 Finite capacity, disproportionate demand (UK example) UK corporate pension liabilities Over GBP 1 trillion Proportion of UK corporate pension liabilities insured each year Under 1%pa UK Life Companies Annuity reserves GBP 150bn Activity is still small in comparison to the total pensions market In the last 5 years only cgbp 30 billion of pension liabilities transferred

19 Longevity capacity is currently provided by reinsurers Lucida Canada Life 0.1 bn Bank Capital Markets 0.5 bn Bank Capital Markets Aviva 0.5 bn Bank RSA Reinsurance & Capital Markets 1.9 bn Bank Reinsurance Babcock International 1.2 bn Bank Reinsurance Royal County of Berkshire 1.0 bn Reinsurer BMW British Airways 3.0 bn Bank Reinsurance 1.3 bn Bank Reinsurance Pall 0.1 bn Bank Capital Markets ITV British Airways 1.7 bn Bank Reinsurance 1.3 bn Bank Reinsurance Pilkington 1.0 bn Insurer Reinsurance

20 The Australian Market Highlights of paper

21 Australian Market Size Australians aged over 60 => 4.2 million. 2.8 m aged % Australians over age 65 receive full or part Age Pension Population is growing, aging, living longer, super at retirement age is growing Total Retirement Products - New Single Premiums ($ bill) Product Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Allocated Annuities Term Certain Annuities Lifetime Annuities Total Source: DEXX&R Dec 2012 Life Analysis Tables

22 Australian Retirement Products Allocated Pensions with or without guarantees Term Certain annuities - interest only or nil RCV Immediate Annuities Reverse Mortgages Government Age Pension

23 Allocated Pension - with retirement income g'tee Source: AMP North Super & Pension G'tee PDS

24 Immediate Lifetime Annuities a bet each way 1. Comminsure ILA with long guarantee periods Source: Comminsure ILA PDS Age at policy commencement Maximum guarantee period - Males Maximum guarantee period - Females years 26 years years 22 years years 18 years 2. Challenger ILA with commutation values at duration 15 years Source: Challenger ILA PDS Age at policy commencement Commutation Value Males single life Commutation Value Females single life % 100% % 90% % 50% % 30% % 15%

25 Integration of Allocated Pension and Age Pension AustralianSuper Industry Fund illustration Super Account Balance $50,000 $2,640 $100,000 $5,280 $250,000 $13,200 $500,000 $27,000 Combined Annual Payments from Super & Age Pension Super Account Age Pension Single $20,100 Couple $30,300 Single $20,100 Couple $30,300 Single $17,832 Couple $30,300 Single $8,076 Couple $21,432 Combined Annual Income Single $22,740 Couple $32,940 Single $25,380 Couple $35,580 Single $31,032 Couple $43,500 Single $35,076 Couple $48,432 Source: AustralianSuper PDS from website

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28 Deferred Annuities Highlights of paper

29 What are we actually talking about? Can we really market this? The liability tail is now even longer? What assets? Any lessons learned? Mortality and improvements? 6 key questions

30 The saucy middle Consumers Risk Carriers

31 What are we actually talking about? Payment of guaranteed income Income starts after a deferral period Single Premium Geared towards the post retirement segment

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33 The liability tail is now even longer? Don't know L The immediate mitigants: packaged cap on maximum length of payment stream maximum deferral period initially of 10 years No optionality for withdrawals The wishlist: industry longevity pool deconstruction of risk with some remaining with policyholders

34 What assets? Don't have A Can consider alternative strategies other asset classes OTC swaps (long duration or currency) swapping market for modelling risk More likely that additional capital needed until longer dated government bonds market exists

35 Any lessons learned?

36 Mortality and improvements?

37 Mortality and improvements? 4.5%-5.0% 4.0%-4.5% 3.5%-4.0% 3.0%-3.5% 2.5%-3.0% 2.0%-2.5% 1.5%-2.0% 1.0%-1.5% 0.5%-1.0% 0.0%-0.5% -0.5%-0.0% -1.0%--0.5% -1.5%--1.0% -2.0%--1.5%

38 Mortality and improvements?

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40 Conclusion

41 Conclusion Insurance industry well placed to take advantage of retirement fund trends Limited true longevity hedge products at present DLA development expected due to tax and industry drive Strong marketing appeal BUT More work needed on regulatory clarity and risk structuring

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