Addressing the Challenge of Global Ageing—Funding Issues

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Addressing the Challenge of Global Ageing—Funding Issues and Insurance Solutions
for the lack of LTC insurance purchasing is that individuals are inadequately informed
about the products available and that they ignore low-frequency, high-severity events
that have not occurred recently. Another explanation for the limited development of LTC
insurance markets includes the phenomenon of adverse selection, i.e. the fact there is an
over-representation of high risks in the insured population.
To address the relatively low development of the market for LTC insurance, Courbage
discusses a number of proposals such as combining LTC insurance and life insurance,
reverse mortgages or private savings. “The insurance mechanism seems well adapted to
apply to this risk,” Courbage suggests.
Greg Becker, Product Development Actuary at Reinsurance Group of America (RGA),
offers an in-depth analysis of the opportunities and limitations associated with the
insurance industry’s role in addressing longevity funding issues, with an emphasis on
the U.K. Becker argues that the need for longevity protection has risen as retirement
ages in public and private pension arrangements have not kept pace with increased life
expectancy. While there is no doubt that the need for longevity derisking solutions is
large, estimates vary, according to Becker. He presents a recent estimate of pension
assets which provides a guide to the size of the longevity market: there was more than
US$27.5tn invested in pension fund assets at the end of 2011.
An individual’s projected retirement income can be seen as a proxy for an individual’s
longevity risk, as captured by the pension replacement ratio (PPR). The difference
between countries is enormous, with the PPR ranging from slightly more than 40 per
cent in Australia to about 90 per cent of the final salary in Italy. Equally different are
the specific contributions by the three main pillars of the retirement system. Becker
elaborates on the reasons for this heterogenous picture and provides a concise overview
of the various insurance products that have been designed to mitigate longevity risk, both
from an employer’s and an individual’s point of view. He believes that reinsurers have a
particular competitive edge in providing such solutions due to their global perspective,
their superior diversification and their existing liability portfolio which offers a certain
degree of mortality risk as a natural offset. “Thanks to their multi-national exposure, and
since different countries and markets are exposed to different mortality and longevity
drivers—whether they be social, economic or catastrophic in nature—increasing one’s
geographic diversity lowers the volatility of the portfolio in aggregate,” the author points
out.
However, Becker stresses that “(…) the need for solutions exceeds capacity, and some nontraditional
and alternative approaches need to be considered.” He specifically elaborates
on capital market-based solutions such as a traded longevity index as pioneered by the
The Life and Longevity Markets Association, a U.K.-based body. Investors (like hedge
funds) might be enticed by the additional diversification offered by this new asset class.
Krzysztof M. Ostaszewski explains in his second contribution why all four pillars of oldage
protection need to work in concert to enable a holistic and sustainable set of solutions.
The author focuses on the four pillars as a key component of modern economies’ financial
infrastructure and the need to ensure positive “real economy” implications—in light of
the lessons from the recent financial crisis, which saw large parts of the financial system
develop into a major liability and drag on real economies.
Referring to the design of public and private retirement systems, Ostaszewski proposes
that “the problems of Greece in early 2012 are not unlike the problems that even the