Addressing the Challenge of Global Ageing—Funding Issues

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Addressing the Challenge of Global Ageing—Funding Issues and Insurance Solutions
the impact of insurance products and services (or their absence) and the significance of
insurers in the capital markets.
Liedtke and Trainar point out that insurance contributes close to 7 per cent to global GDP
and is a major employer, for example in Germany and the U.S. where the sector accounts
for 3.4 per cent and 1.6 per cent of all jobs, respectively. They also elaborate in detail on
insurers’ role as major institutional investors and “financial intermediaries, converting
policyholder payments into longer term investments, often without generating the liquidity
constraints facing most deposit taking institutions.” The authors argue that insurance has
a double positive impact on aggregate savings: firstly, it increases the general savings
rate, especially through the existence of life insurance products but also by creating pools
of assets that are meant to cover potential future claims. It thus creates deeper markets
and allows for more investments. “The investment portfolio of insurance companies in the
OECD countries has grown steadily over the past decade (…). From 2001 through 2008
total investments more than doubled from US$8.6tn to US$17.8tn in 2008 (a compounded
annual rate of almost 11 per cent)”, the authors explain. Secondly, Liedtke and Trainar
argue, insurance decreases the level of unnecessary (individual) precautionary savings,
often unavailable to capital markets. This stimulates investment and consumption by
reducing bound (and therefore unproductive or less productive) capital.
The authors conclude by urging all relevant stakeholders, governments and regulators in
particular, to fully appreciate the “constructive and helpful effects” arising from insurance
in the context of old-age security. “Especially the complementary interaction between
social security systems and the private market solutions offered by insurance companies
are disregarded and the special role that insurers can play for financial and social
stability is often underestimated.”
The series of contributions concludes with a piece from Mark Twigg, Executive
Director, Cicero Consulting, and author of a major independent global research study
commissioned by HSBC. Based on The Future of Retirement series of surveys he
discusses the implications of global ageing from the individual’s and his or her financial
position’s perspective.
Twigg points out that the cost of mitigating the risks of longer life expectancy can be
expected to fall increasingly on households, for the reasons explored at great length in
other chapters of this report. In this context he believes that “(…) the social utility of
insurance in helping households to manage and mitigate the long-term financial risks
posed by high inflation, volatile investment returns and increasing life expectancies
places the insurance industry in a prime position to help households deal effectively with
the changing demographics, as well as prepare them for the likelihood of less generous
state and employer pensions.”
Twigg reveals that when it comes to establishing a more balanced approach, 64 per cent
of The Future of Retirement respondents preferred options which involved having to save
more, compared to 23 per cent who preferred to work longer and just 13 per cent preferred
to pay more tax. It is important to note, however, that when considering the challenge
of building greater pensions assets, not all households or countries start from the same
position. Current pension wealth is distributed very unequally. Those countries in which
governments have historically spent less have also seen households and employers save
more through private pensions. For example, the U.K. and Irish governments currently
spend around 6 per cent of GDP on pensions, compared to 15 per cent in Italy. Against