IIS 44th Annual Seminar The Life Insurance Market’s Response to Aging: Mega or Mini? Gustavo Ferro Universidad Argentina de la Empresa (UADE) and CONICET Taipei (Taiwan), July 16th, 2008

2 Introduction Aging implies more savings for retirement, worldwide In a competitive and complex environment: –What piece of the retirement market will be provided by insurers? –Can we expect a “Mega” or “Mini” response of the industry? –Keeping in mind that “Insurance is sold, not bought”, who are the relevant counterparts? We propose some answers to these questions in this presentation

3 Outline of this “policy paper” Introduction Aging Demand-side Supply-side Regulation Proposals Conclusions

4 Aging Average life expectancy at birth Source: Jousten (2007) on World Population Prospects: The 2004 Revision Highlights, United Nations Forecast More developed regionsLess developed regions 55 World: 65.4 World: 75.1

5 Demand-side, current state From Pay-As-You-Go Defined-Benefit systems towards Fully-Funded Defined-Contribution schemes. Variety of reforms In 2006, assets of pension funds in OECD countries accounted for US$ 24.6 trillion (72.5% of the GDP) Few annuities are voluntarily purchased

6 Demand-side, looking ahead The accumulation phase of pension funds will soon be followed by a decumulation phase Tax provisions could influence non-optimal options that are currently selected by retirees, such as: –Lump sum, Phased withdrawals –“Rules of thumb” for investing and withdrawing Why not annuititize? – relevant discussion issues –Adverse selection –Perception of “expensive” premiums –Bequest motive –Precaution savings for long-term care

7 Supply-side: Money Worth Ratios General populationAnnuitant population MWR on nominal (immediate single payment) annuities – Male, 65 MWR using public bond rateMWR using corporate bond rate Australia Canada US UK Switzerland Source: Mackenzie (2002)

8 Supply-side facts Only an annuity provides longevity insurance However, MWRs reveal adverse selection and few countries have developed annuity markets There are market and regulatory responses and innovative “prototypes” of annuity contracts Factors that could yield an extended market include: –Better mortality data and regulated mortality tables –Public sector involving in their development –Mandatory annuitization at some age –Innovative contracts

9 Regulation Based on market failure perspective Intended “to protect people who cannot easily protect themselves” Prudential regulation and opposite risks Mandatory annuitization? Tax provisions could induce annuitization

10 Proposals for insurance industry Departing from an analogy of the three pillars for pensions of the World Bank Multi-Tier Insurance Package for the Pensioners’ Saving Decumulation Phase (MIP) First Tier Allowed Lump-Sum Decumulation Second Tier Third Tier Phased Withdrawal in sub accounts (“Lockboxes”) Annuitization by an “Annuiplus” purchase VoluntaryMandatory

11 MIP concept in detail

12 Hypothetical example Calculations for illustrative MIP-Bundles (basis: US mortality and MWRs) Lump sum + Immediate Annuiquest Total cost Lump sum at 65 ($15,000) Death insurance at 65 ($10,000) Immediate annuity, from 65 ($9,562 p.a.) Costs in thousands US$ Lump sum + Deferred Annuiquest Total cost Lump sum at 65 ($15,000) Death insurance at 65 ($10,000 p.a.) Deferred annuity, from 70 ($9,562 p.a.) Phased withdrawal Costs in thousands US$

13 Conclusions The “Mini” scenario (reactive response) implies risk of little business and low margins (One) “Mega” Scenario is proposed to raise the industry’s awareness among politicians, regulators, international organizations and pensioners It tries to cover demand-side needs and to be appealing to politicians, regulators and international organizations looking for financial stability

Thank you for your attention

15 Appendix 1: Aging

16 Appendix 2: Money Worth Ratios

17 Appendix 3: An hypothetical example