Choosing Population Projections for Public Policy Wednesday October 29 th, 2008 Kindly Supported By:

Welcome address Christian Mumenthaler Head of Life & Health ILC-UK & the Actuarial Professions conference on Choosing Population Projections for Public Policy 29 October 2008

Slide 3 Demographic changes are an increasing challenge for society Ageing populations present a financial burden to the public and private sectors Risk capital in the insurance industry can carry only a small proportion of longevity risk Capital markets provide a large enough pool of capital to carry the risk ~GBP 1 000bn ~GBP 10bn Age distribution, Europe 1950 – 2050 Old-age dependency ratios are sharply on the increase The total volume of UK bulk annuity transfers from Defined Benefit pension schemes to insurers is estimated to reach GBP 10bn in 2008*, out of total liabilities of GBP 1 000bn 2008 * Source: Pension Buyouts 2008, Lane Clark & Peacock

Slide 4 Catalysts for risk transfer Well-understood and widely-accepted risk models Credible, timely and consistent data Motivated buyers and sellers Christian Mumenthaler 29 October 2008

Slide 5 Historically, longevity risk has typically been underestimated Life expectancy estimates have moved by seven years over the last 30 years, and views vary widely Actual and projected life expectancy at birth, UK males, 1966 – 2031 Christian Mumenthaler 29 October 2008

Slide 6 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 Christian Mumenthaler 29 October 2008

Slide 7 Research should focus on cause-based mortality Heart disease Cancer – lung Cancer – other Parkinson’s, Alzheimer’s, dementia Pneumonia External respiratory Chronic obstructive pulmonary disease Stroke Other External Proportion of mortality by cause Five-year age bands Digestive Christian Mumenthaler 29 October 2008 Source: Office for National Statistics Twentieth Century Mortality Files

Slide 8 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

Slide 9 Risk requires capital UK insurers carry capital against tail events through the Individual Capital Assessment UK pension funds currently have no explicit capital requirement Risk-based regulatory regime (eg, Solvency II) would require pension schemes to hold capital against risk Christian Mumenthaler 29 October 2008

Slide 10 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 Governments can support this development – investment in research to improve understanding of old age mortality – frequent and timely publication of granular mortality data – regulate to encourage adequate capital to protect pensioners and oblige pension schemes to recognise longevity risk Christian Mumenthaler 29 October 2008

The State of Knowledge on Mortality and Healthy Life Expectancy Kindly Sponsored by: