abcd Panning for Silver The Implications of an Ageing Population Joanne Wells Younger Member Convention 2002

TODAY'S PRESENTATION  Population trends  Opportunities for insurers  Longevity and medical advances  Developments in the pricing and underwriting of risk

 Ageing of the ‘baby boomers’  Declining fertility  Improving mortality  Some consequences: –The number of people aged over 50 is forecast to grow by 6m over the next 25 years –Total number of older people is higher and these people are also living longer –A different target market for the financial services industry Age profile of the UK is rising THE CHANGING DEMOGRAPHICS

Fertility Rate DEMOGRAPHICS Source: Government Actuaries Department

Improving Mortality DEMOGRAPHICS Life expectancy at different ages Source: Government Actuary’s Department

Projected Age Distribution United Kingdom DEMOGRAPHICS Source: Government Actuaries Department

Income in Retirement WEALTH Source: Department of Social Security (2001) Pensioners’ Income Series,

Home Ownership WEALTH Source: NOP, Financial Research Survey, 2000

and its problems LONGEVITY HAS ITS BENEFITS  All financial services brochures for the silver market show happy attractive old people - we all want to live longer  ‘Silver market’ is expanding………..  Insurers run significant extra risks on their new and existing business  Reinsurers are keen to selectively expand into this large market by assisting their clients

WHICH RISKS ARE PROVIDERS FACING?  We are living longer - but not necessarily in a healthy state  We will work, and need income protection, for longer  People will need life assurance at older ages  Annuitants are already living longer and will continue to do so  Impaired annuity market will grow  The need for long term care will be greater

PROVIDERS FACE EXTENDED RISKS FOR:  Income protection  Life assurance  Critical Illness  Annuities  Impaired annuities  Long term care

Life Assurance NEW RISKS FOR INSURERS  Improving longevity is good news for existing block!  More demand from older lives –People have children older –Inheritance tax, demand up to age 90 or longer –Retirement age to increase? –Demand for higher ages at entry –Little data available  Reinsurers have mortality studies from around the world and have written such business in specialist areas

 Mortality continuing to improve……  ……….…..but already priced in?  Rates close to bottom? Life Assurance NEW RISKS FOR INSURERS

The Annuity Market IMPROVED LONGEVITY HAS ITS RISKS  Existing blocks - improvements greater then expected  New business - how much further will mortality improve?  How much have rates changed - due to improved longevity? –Male 65, £100,000 purchase price in 1991: £9,455pa –Male 65, £100,000 purchase price today : £8,511pa –Reduction in annuity: 10%  Can reinsurance help?

Will reinsurers help? REASSURANCE AND ANNUITIES  Reinsurers know about mortality, but most of us are reluctant to take longevity risk from existing blocks  Why? –Life insurer has margins in investment and expenses –Everyone worried about the scale of future improvements - including the reinsurers –A large possible downside for little upside!  So where can we help in this market?

A growing market IMPAIRED ANNUITIES  We are keen to provide support to clients for impaired annuities, why?  The market is relatively new and growing  Opportunities for innovative product development  Underwriting and mortality pricing are our key strengths  Risk can be high, so insurers keen to pass risk on  Potential upside is higher - in relation to downside

Key questions for reinsurers and providers IMPAIRED ANNUITIES  Which market segment? –Serious impairments –Lifestyle impairments –Occupation / location  What is risk profile for each impairment?  How will medical advancement affect experience? –New drugs for Alzheimer's for example

Markets LONG TERM CARE  Two separate markets –Pre-funded –Immediate needs  Insurers and reinsurers and tried to develop a pre-funded market in the early 90s, without success  Immediate needs market is now growing

Immediate Needs LONG TERM CARE  Impaired annuity, with different characteristics  Older age at entry, typically aged 80 and higher  Lower expected life expectancy  No compulsion to effect annuity

REINSURANCE FOR IMMEDIATE NEEDS LTC  Underwriting at advanced ages is a difficult art  Pricing information is scarce  Potential error could be high –Living one more year causes larger proportionate loss  For shorter term annuities investment yield less significant  Reinsurance product a great benefit for providers

Role of Reinsurance EQUITY RELEASE  Great product for the ‘silver market’  Product structure is complex ‘behind the scenes’  Product design depends on ‘expected’ longevity  Lenders require repayment based on ‘expected’ deaths  Reinsurance product can swap ‘expected’ for ‘actual’

WHAT IS A REASSURANCE PRODUCT?  A combination of advice and support on: –Product development –Pricing –Underwriting –Claims –Marketing –Research  Followed by a comprehensive financial programme to share the risk between the provider and reinsurer

 Research  Pricing  Underwriting  Product design  Ongoing advice  Fits very well with our skills and services brought to a long term client partnership Reinsurance Services Required THE SILVER MARKET

Developments in the Pricing and Underwriting of Risk

SOCIAL POLICY  To underwrite and price for the elderly we must consider a wider social view  Government and social policy will be a major influence  Current elderly population are not high priority for government  What will happen as elderly population becomes more affluent?

Our Healthier Nation GOVERNMENT INITIATIVES  Priority areas are: –Heart disease and stroke –Accidents –Cancer –Mental health  Aim to reduce death rates  Targetted at working population - up to 65

IMPLICATIONS OF GOVERNMENT POLICY  As initiatives work, there will be knock on effect to older ages  Improving mortality will continue into old age  We will view people with minor impairments as ‘standard’  Those disease free will be ‘super preferred’  Major implications for annuity market, especially with growth of impaired products

AVAILABILITY OF TREATMENT  Availability of diagnosis and treatment for older lives will be key  As our generation ages, we will demand the best care - and many of us will be able to pay for it  We won’t accept priority given to younger lives  More treatment will be given to elderly lives  Underwriting will become even more specialised

 Life expectancy for men was 45 in 1901 and is projected to be 84 in 2011 (GAD 1998 population projections)  Medical science has advanced substantially in the 20th century  Still developing very fast  Of specific interest to the life assurance and health industry: –New diagnostic techniques –New screening programmes  May improve mortality - but what about morbidity? MEDICAL ADVANCEMENT

SPECIFIC DEVELOPMENTS  Improvements in treatment of hypertension have already benefited incidence of heart attack and strokes  Screening initiatives –Cervical screening –Prostate cancer

New Screening Programs EXAMPLE

 Prostate Cancer  Screening programme now proposed –2 year trial launched April 2001 –230,000 men between invited to attend for check  Sweden has had a full screening programme for some time –They have one of the highest incidence rates of prostate cancer in the world New screening programmes EXAMPLE

 Many more cases of prostate cancer detected  Average age of detection will reduce  Diagnosis before disease is life threatening  Cases which would have gone undetected will be found  Mortality rates will improve, morbidity rates will worsen Possible effects of successful screening PROSTATE CANCER

Prostate cancer CRITICAL ILLNESS

 Early detection system for lung cancer  Early use of MRI scans for Multiple Sclerosis  Memory assessment testing for Dementia  MRI screening to detect silent stroke  Full body scanning  Genetic screening by GPs in general practice POSSIBLE FUTURE DEVELOPMENTS

 Developments point to improving mortality  Are these improvements already priced in?  If so term rates could be close to bottom  Critical Illness rates set to increase at older ages –Especially if definitions not updated –Guarantees to become more expensive, if available  Other health products to become more expensive at older ages Life and Health PRICING

Annuities PRICING  More players will enter the impaired annuity market  ‘Own mortality table’ pricing by reinsurers  Segmentation of annuity market resulting in lower standard rates  More criticism of annuities?  Further product development

UNDERWRITING THE SILVER MARKET  No ‘clean’ proposals at older ages  How do diseases interact?  Underwriting decision for a disease may vary by product  For example, diabetes: –In middle age insurable for life assurance (with rating) –May not be insurable for health assurance –In old age the survivors may be ordinary rates

 Medical science will continue its relentless advancement  As a result mortality will continue to improve at the middle and advanced ages  Demand for health insurance will grow in these age groups  Product designs in both the health and annuity areas will change  Interaction between product development actuaries and underwriters will become ever more important  Risks run by life insurers and reinsurers will need careful and close monitoring Some speculation SUMMARY

Summary THE SILVER MARKET  Large potential for growth in risk products  Pricing and underwriting are major challenges  Reinsurers will continue to research this growing market and provide their clients with competitive advantage

abcd Panning for Silver The Implications of an Ageing Population Joanne Wells Younger Member Convention 2002