LongevityThe challenges for governments,

industry and the actuarial profession

Torben Thomsen

Swiss Re

Agenda

The demographic transformation

The need for new solutions and capacity

Facilitating the creation of a longevity risk market

Conclusions

Fertility in the developed world

has dropped below the

replacement rate

3.3

2.8

2.0

2.5

2.9

2.0

1.7

1.31.3

1.9

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

France Germany Japan UK US

Lif

eti

me

Bir

ths p

er

Wo

ma

n

1960-1965 2000-2005

Source: United Nations, World Population Prospects, 2006 Revision

2.1

Life expectancy of the longest-

lived increases at 3 months

per year for the last 150 years

Source: Oeppen & Vaupel, broken bounds to life expectancy, Science 2000

Record female life

expectancy from 1840

to present

Horizontal black lines

show asserted ceilings

on life expectancy, with

a short vertical line

indicating the year of

publication

Dashed red lines denote

projections of female life

expectancy in Japan

published by the United

Nations in 1986, 1999,

and 2001

Improvements are significant

at post-retirement ages

Male Mortality improvements by age

-2%

-1%

0%

1%

2%

3%

4%

5%

40 45 50 55 60 65 70 75 80 85 90

US England & Wales JapanSource: www.mortality.org, lifemetrics

Increasing costs of an ageing

society present challenges for

public finances

Source: Center for Strategic and International Studies

Public benefits to the elderly as % of GDP

Public Pensions Health Benefits Other Benefits

0

5

10

15

20

25

30

35USA UK Germany France Japan Netherlands Italy Canada Spain

Source: OECD Global Pension Statistics and OECD estimates, except for the

UK which is from the ABI. Exposure shown for OECD registered countries only-

5

10

15

20

25

The global longevity issue

is huge

Global longevity exposure estimated to be

approx CHF 20 trillion of pension assets

90% of exposure related to pension funds,

and 10% pension insurance contracts

Insurers’ exposure dominated by markets

with compulsory annuitisation

Corporate sponsors exposed to defined

benefit pension schemes

Governments committed to fund old-age

pension/health benefits

Pension Assets

CHF trn (proxy for

longevity exposure)

Americas

UK

Europe

Asia

Holders of Longevity Risk

Public Sector:

State pensions,

public sector

pensions, long term

care & medical

Corporate Sector:

Defined Benefit

Pension Schemes,

Retiree Medical

Benefits

Insurance Industry:

Annuity Portfolios,

Long Term Care

Individuals:

Risk of “outliving”

assets

Reduced BenefitsBulk Buy-Outs

Demand for products providing income in retirement

Finite capacity,

disproportionate demand

There is insufficient capacity in the insurance market to

absorb the future demand for longevity risk transfer from

UK pension plans

Although the bulk annuity market is growing, activity is still small in comparison to

the total pensions market

– At the end of 2009 approx GBP 33 billion of pension liabilities had been

transferred through bulk annuity buyouts

UK corporate pension

liabilities

GBP1.4 trillion

Proportion of UK corporate

pension liabilities insured

each year

Under 1%pa

UK Life Companies Annuity

reserves

GBP 150bn

Male life expectancy at age 65

Risk is systematic in nature

10

11

12

13

14

15

16

17

18

19

1980 1985 1990 1995 2000

Peri

od lif

e e

xp

ecta

ncy a

t age 6

5

W. Germany England & Wales

France Sweden

USA Japan

Canada

Source: www.mortality.org

Ageing populations present a financial burden to the

public and private sectors

Longevity risk is systematic – scale and portfolio

diversification of limited use as risk mitigation tools

Risk capital in the insurance industry can carry only a

small proportion of longevity risk

Reinsurers can provide some capacity…

Capital Markets solutions required to provide large

enough pool of capital to carry the risk

Demographic changes are an

increasing challenge for society

Catalysts for risk transfer

Motivated buyers and sellers

Well-understood and widely-accepted risk models

Credible, timely and consistent data

Longevity is a new risk for capital

markets

The capital market for longevity is in its infancy

– Very few deals done so far – no tradable rated bonds

– Most risk placed with (re)insurers or kept on banks’ balance sheets

– It took 10 years for Nat Cat ILS market to develop and it is still esoteric

90

500 475 500

0

250

500

750

Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09

Lucida hedged longevity

exposure with J.P. Morgan

using derivative contract

linked to the LifeMetrics

Longevity Index

J.P. Morgan executed a

customized longevity

risk derivative contract

with Canada Life

Babcock first stage of

a longevity swap deal

with Credit Suisse RBS enter into

longevity swap with

Aviva

1.5 yrs

Longevity

liabilities

GBPm

Evolution of longevity market

Indemnity based

“Named lives” – matches exposure of risk holder

Extensive due diligence and disclosure requirements

Bespoke, limited scope for liquid, secondary trading market

Appeal to narrow range of investors, e.g. specialised Insurance Linked

Securities funds

Index based

Linked to publicised mortality index, e.g. general population

Risk holder retains basis risk between own portfolio and index

Standardised, scaleable, more suited for secondary trading

Likely to appeal to wider investor base, e.g. money managers and multi-

strategy hedge funds

Is Longevity risk appropriately

priced?

6.6% UK market annuity rate for male age 65

– 23.1 years life expectancy for male age 65 on standard

tables

– 7.1% annuity rate on standard table discounted on £-gilts

8.0% Dutch market annuity rate for male age 65

– 20.1 years life expectancy for male age 65 on standard

tables

– 7.2% annuity rate on standard table discounted on €-

treasuries

Future uncertainty requires

substantial risk capital

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

65 69 73 77 81 85 89 93 97

Age

Mort

ality

by c

ause a

nd a

ttain

ed a

ge

Heart disease

Cancer - Lung

Cancer

COPD

Pneumonia

Parkinsons,

Alzheimers,

DementiaStroke

Other

Respiratory

External

Digestive

1st percentile

90th percentile

99th percentile

Source: ONS, Swiss Re calculations

Graph shows

deaths by cause

by 5 year age-

group.

Percentiles show

mortality

evolution for

cohort of current

65 year-old

males as % of

current rates

UK : Insurers vs Pension Fund

Insurer Pension Fund

Technical

reserves

Prudent

- base level, plus

allowance for future

trend

Prudent

- base level, plus

allowance for future

trend

Capital Regulatory required

capital held at high

level

No regulatory capital

requirement

Funding

requirement

Required to be

solvent at all times

Often in deficit -

funding plan in

place

Best estimate

mortality basis

is often well

aligned

UK Pension vs Insurer

capitalisation

Solvency

capital

Technical

provisions

Capital made up of

equity, debt,

reinsurance …

“Prudent” in an

insurance context (eg

no high discount rates)

Covenant made

up of employer

goodwill,

reinforced by

legislation/schem

e rules, recovery

plan, contingent

assets …..

“Prudent” in a

pension context

Covenant

Technical

provisions

Best estimate view of

demographic basis

often very close

USA : Pension Fund Valuation

2006 Pension Protection Act:

Prescribed interest rate

Static mortality table updated each year to allow for

mortality improvements for a further year

Generally no consideration of further future mortality

improvements

Transition period - schemes can get dispensation to

hold lower technical provisions

USA – Mortality Improvement

compared to UK

Birth Cohort 1934 - Rate of improvement

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

19

68

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

USA 1934 UK 1934

Center for Disease

Control and Office for

National Statistics data,

Swiss Re calculation

19

68

19

71

19

74

19

77

19

80

19

83

19

86

19

89

19

92

19

95

19

98

20

01

20

04

60

65

70

75

80

4.0%-5.0%

3.0%-4.0%

2.0%-3.0%

1.0%-2.0%

0.0%-1.0%

-1.0%-0.0%

-2.0%--1.0%

USA – Mortality improvements

Center for Disease Control and

US Census Bureau data, Swiss

Re calculation

19

68

19

71

19

74

19

77

19

80

19

83

19

86

19

89

19

92

19

95

19

98

20

01

20

04

20

07

20

10

60

65

70

75

80

4.0%-5.0%

3.0%-4.0%

2.0%-3.0%

1.0%-2.0%

0.0%-1.0%

-1.0%-0.0%

-2.0%--1.0%

USA Mortality improvements

Scale AA

Center for Disease Control, US

Census Bureau and Society of

Actuaries data, Swiss Re calculation

Actual AA

USA – Mortality improvements

Birth Cohort 1934 - Rate of improvement

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

1,9

68

1,9

71

1,9

74

1,9

77

1,9

80

1,9

83

1,9

86

1,9

89

1,9

92

1,9

95

1,9

98

2,0

01

2,0

04

2,0

07

2,0

10

2,0

13

2,0

16

"AA Improvements" USA 1934

Center for Disease Control and

Society of Actuaries data, Swiss

Re calculation

Male life expectancy at age 65

2007 UK vs USA

16.0

17.0

18.0

19.0

20.0

21.0

22.0

UK Pension table US Pension table

improvements

base

UK: 100% S1PMA

projected with

Medium Cohort,

1.5% Floor.

Source: Institute of

Actuaries, Swiss Re

Calculation

USA : RP00 with

Scale AA projection

(to 2007 for base and

to 2017 (IRS basis)

for improvements)

Source: Society of

Actuaries, Swiss Re

calculation

Multinational Company Annual Report 2008

Assumptions used in valuing the pension liabilities in 2008.. life expectancy

assumed for male pensioners aged 65..

UK: 21.2 years…US: 17.8 years

Reserving and

Capital Requirements

Should be..

Risk based

Consistent between legal forms of risk holders…if

risks and guarantees are similar

Encouraging sound risk management and mitigation

practices

EU Solvency II a big step in this direction

…but doesn’t apply to Corporate Pension Schemes

Historically, longevity risk has

been underestimated

Actual and projected life expectancy at birth, UK males, 1966 – 2031

Which Model?

0.02

0.03

0.04

0.05

0.06

0.07

0.08

19

68

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

20

18

20

20

Lee-carter (standard) Lee-Carter (Age-Period-Cohort) Actual

Center for Disease Control data and US Census Bureau data, Swiss Re calculation

The 1-in-a-hundred-year

scenario under one

model is approximately

equal to the mean

scenario under the other

model

US Males, age 75

Inter and Intra model risk

A comparison using 99th percentiles at run-off of the four tested models

of a level annuity at age 65 (interest rate of 4%)

Swiss Re calculation

% of PV of Annuity

payments

Inter-model variation 3-10%

Intra-model variation 7-12%

Implied Standalone

Capital Requirement

8-16%

Netherlands improvements

1968-19921

96

8

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

60

65

70

75

80

3.0%-4.0%

2.0%-3.0%

1.0%-2.0%

0.0%-1.0%

-1.0%-0.0%

-2.0%--1.0%

-3.0%--2.0%

Centraal Bureau voor de

Statistiek data, Swiss Re

calculation

NL improvements 1968-1992

Projected to 2007

19

68

19

71

19

74

19

77

19

80

19

83

19

86

19

89

19

92

19

95

19

98

20

01

20

04

60

65

70

75

80

3.0%-4.0%

2.0%-3.0%

1.0%-2.0%

0.0%-1.0%

-1.0%-0.0%

-2.0%--1.0%

-3.0%--2.0%

Projection from 1992, Lee Carter Model with cohort term (M3 in Lifemetrics)

Centraal Bureau voor de

Statistiek data, Swiss Re

calculation

NL improvements1968- 2007

Actual

19

68

19

71

19

74

19

77

19

80

19

83

19

86

19

89

19

92

19

95

19

98

20

01

20

04

60

65

70

75

80

6.0%-7.0%

5.0%-6.0%

4.0%-5.0%

3.0%-4.0%

2.0%-3.0%

1.0%-2.0%

0.0%-1.0%

-1.0%-0.0%

-2.0%--1.0%

-3.0%--2.0%

Centraal Bureau voor de Statistiek data, Swiss Re calculation

Capital markets favour credible,

cause-based stochastic projections

Actuarial

subjective

projections

Actuarially-

adjusted

historic

projections

Longevity

modelling

Natural perils

modelling

Stochastic

modelling

Inter-

disciplinary

cause-

based

projections

Maturity of development

Capital markets favour credible,

timely and frequent data

• In terms of frequency and granularity there is scope for

improvement

• Timeliness

The recent move by the ONS to reporting deaths as they are

registered reduces reporting lag

• Governance

An independent agent with an explicit mandate to calculate and

maintain indices is essential

Annually

Quarterly

Weekly

Aggregate

total deaths

Aggregate

age-grouped

deaths

Aggregate

individual-

age deaths

Geographical

age-grouped

deaths

Causal

age-grouped

deaths

Timeliness is key in

data collection for

parametric

Eurowind bonds

Available

in the UK

Not available

Conclusion

Understanding longevity risk continues to be a

challenge for both buyers and sellers of risk

For governments, pension schemes and insurers to

continue providing retirement solutions, developing a

pure longevity risk market is key

Conclusion

Governments, industry and the Actuarial Profession can

support this by

– developing regulatory and accounting standards that:

recognise cost and uncertainty of longevity risk

have consistent treatment of similar risks and guarantees

irrespective of legal form of risk holder

encourage sound risk management practices

– investment in research to improve understanding of old age

mortality

– frequent and timely publication of granular mortality data