development of the uk longevity market rajeev shah 9 december 2009

Development of the UK longevity market

Rajeev Shah

9 December 2009

www.barnett-waddingham.co.uk

Agenda• Background

• Economic issues

• Corporate issues

• Financial issues

• Longevity Market

• Focus of longevity research


BackgroundImprovements in longevity since 1855Annual average rate of improvement in longevity

Males aged 65 – 74 from 1855 - 2005

0.0%

1.0%

2.0%

3.0%

4.0%

1855 1885 1915 1945 1975 2005


BackgroundChanges in life expectancy at age 60



• Economic issues






Economic issuesOverview

• Aging population• Dependency ratio increasing

– Increasing pensioner population relative to working population

• Health and old age care costs increasing– Healthy vs unhealthy life spans

• State pension costs increasing

• Increased burden on state / tax payer



• Economic issues






Corporate issues

• Aging workforce– NRAs increasing– Age discrimination legislation introduced

• Future pension provision more expensive

• Deficit on current final salary pension scheme

• Impact depends on size of scheme relative to size of Company– Pension matters affecting commercial issues



• Economic issues






Financial issuesOverview• Population living longer

• Increases the cost of:– Annuities purchased by individuals– Pension funds: DC – individual benefit decreases– Pension funds: DB – shortfall in funding arises– Insurance companies offering annuity benefits etc.– Benefits provided by certain charitable institutions

• Reduces the cost of:– Term / endowment assurance policies– Prepaid funeral plans


Financial IssuesChanges in life expectancy at age 60


Financial IssuesImpact on annuity rates of male aged 60

• Life expectancy of male aged 60 in 2009 increased by 4 years from that expected in 1992

• Assuming interest rate of 5% p.a. and 3% p.a. inflation, £100,000 at age 60 will give an annual income of:

– £4,675 p.a. now, assuming life expectancy of 28.5 years– £5,215 p.a. should life expectancy be assumed to be 24.7 years (as projected in

1992)

• Increased life expectancy => decrease in annual income of approximately 12%

• Require an additional 1% p.a. investment return (from age 60) to achieve comparable income.

• Effect exaggerated, since interest rates fallen significantly since early 1990s => annuity costs increased significantly



• Economic issues






Longevity MarketDrivers of longevity market• Uncertainty about future longevity

• Significant financial implications if longevity is different to expected

desire to protect against changes development of longevity market


Longevity MarketLongevity Products

• Buyout and Bulk Buyout• Longevity swaps• Other more complex products developing:

– Company taking over as sponsoring employer– Buyout, with investment strategy determined by client

who retains investment risk– Limited term cashflow cover and Funding Level

Protection

• Innovation and risk appetite helped by longevity research




• Economic issues





Focus of longevity researchDrivers of Mortality Improvement

Law of diminishing returns at young agesChanging lifestyle

Smoking Obesity

Advances in medical technologyHeart diseaseCancersReversal of aging process


Focus of longevity research Mortality improvements for main causes of death

Source: “Exploring the Critical Path”, Critical Illness Trends Research Group


Focus of longevity research Causes of death

Source: ONS


Focus of longevity research Will mortality continue to improve?

Professor Jay Olshanksy University of

Illinois, Chicago

Olshanksy argues that mortality will not continue to improve at its current

rate. The main reasons he gives are obesity, the spread of disease and, most importantly, the

existence of biomechanical limits on our lifespan.

Professor Shripad Tuljapurkar

Stanford University, California

Study assumes that lifespans increase in line with current trends until

2010, but that anti-ageing technologies would then become available that

would prolong life much further. These drugs and

therapies would cause mortality to decline five

times faster than historical rates between 2010 and

2030, before normal service was resumed.


Differences in mortality bysocio-economic class

• Mortality varies by social-economic class• Consider the following class definitions:


Life expectancy and social class

Source: ONS


Longevity by social classImpact on costing

• Life expectancies of Male aged 65 (source ONS):

-Class I (Professional) 18.3 years

-Class V (Unskilled manual) 14.1 years

• Significant difference in cost of providing an annuity or a pension to the different classes

• Insurance companies and pension schemes use additional information to improve estimate of costs / pricing.


Longevity by social classExplanations for differences

LifestyleSmoking Eating habitsAlcohol consumption

WealthEducationAccess to medical servicesSocial networks

Nature of employment Injury risksLong-term health risks


Longevity by social classProxy Factors for Socio-Economic Status

Indicators of socio-economic status could include:• The individual’s occupation• The industry in which the employer operates• The individual’s salary• The amount of benefit (but there are

problems associated with using this)

The individual's geographical location (postcode)


Regional Mortality Differencesin the UK: Cold to Hot

Data Source: ONS Key Population & Vital Statistics 2003-2004


SMRs in the UK: Cold to Hot

Data Source: BW Model


SMRs in London: Cold to Hot



SMRs in London: Cold to Hot

Dagenham: e65 = 16.33

SMR: 105.86%

Merton: e65 = 18.81 SMR:

77.09%

Glasgow City: e65 = 16.20 SMR: 107.69%


but… Broomhill in Glasgow: e65 = 18.06 SMR: 84.62%


Any Questions?

Financial and Economic issues of increasing longevity

Rajeev Shah

9 December 2009

development of the uk longevity market rajeev shah 9 december 2009

Documents

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annual income

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