Half of all babies born today will live to be 100. This is according to a new study by the University of Southern Denmark’s ageing research centre.
Life expectancy in the developed world has increased steadily since the 1950s. Several factors are contributing to longer, healthier lives including health education, improved nutrition, genetic screening, medical advances, preventative medicine and increased wealth.
The ‘longevity revolution’, as it is often described, is arguably one of society’s greatest achievements, but it also poses a number of economic and social challenges.
In the UK in 2007, the number of people over the age of 65 was greater than the number below the age of 16 for the first time.
The average length of retirement is expected to span over two decades in the not too distant future, according to ‘The Future of Retirement’, a study by HSBC Insurance. This leads to growing concern that people will outlive their money.
A perfect storm
On the immediate horizon, the ageing population combined with the economic downturn has created a pensions ’perfect storm’, according to HSBC.
“If people prepare adequately for the long-term an extended later life can present a golden opportunity for many – but now is the time for people to seriously consider boosting their pensions contributions to improve their prospects of a comfortable retirement,” says Stephen Green, group chairman of HSBC. “The cost of procrastination is likely to be high.”
Alongside pensions, demand is likely to increase for other private solutions in the future. Annuity products – including variable and deferred annuities – are proving increasingly popular. These products effectively unlock the cash an individual has saved in a pension scheme and uses it to provide an income through retirement.
Income protection and health products, including long-term care, are also expected to grow in popularity.
New opportunities
Catering to an ageing population provides many opportunities from an insurance perspective, says Cathy Toomey, active underwriter of Life Syndicate 308 at Kiln. “For us, from a purely protection point of view, it will increase the size of our market because we’ll be seeing older, healthier people who are insurable and will need to have protection.”
“We have just commissioned our own mortality study from an actuary to see what they think we’re going to be looking at in the next five years in terms of life expectancy for people over 65,” she reveals. “We’ve got a fairly high number of older lives on our books at the moment and so far it’s been highly profitable and if we can access more of that, that would be great.”
From a life insurance perspective, longevity presents difficult actuarial challenges as pricing can no longer be based purely on historical data.
“As population dynamics are changing, history doesn’t necessarily inform us properly as to what we’re going to have to charge in future,” explains Toomey. “That’s going to be the biggest challenge – making sure we’ve got the pricing right.”
This is more of a challenge for insurers that provide long-term guaranteed rates. For Toomey, pricing can be adapted on a year-by-year basis and over time should come down. “Because mortality will be improving over the long term, you could be charging significantly less for a certain age in 25 years time than the rates you might be charging now.”
