Current approaches to forecasting longevity risk are inadequate

by Artemis on September 1, 2011

A new report published today by reinsurer Swiss Re says that the approaches currently taken to forecast longevity are inadequate and can lead to inaccuracies. The unprecedented increases in life expectancies experienced in recent decades have been consistently underestimated due to the use of inadequate methods for assessing future longevity. This leads to funding difficulties and shortfalls for employers, insurers and governments.

The increase in life expectancies has resulted in a massive pension shortfall which Swiss Re say has been exacerbated by the traditional methods used to forecast longevity increases failing to take into account certain emerging trends. “The failure to consider future drivers of mortality in historical predictions contributed to employer pension funds under-reserving for longevity risk and other bodies, including governments, not budgeting effectively for funding an ageing population,” explained Daniel Ryan, head of life and health research and development at Swiss Re.

Swiss Re say that in order to effectively manage longevity risk, robust and predictive approaches must be developed. Such approaches would use forward-looking scenarios based on social factors, medical treatments and preventative approaches that influence and impact disease.

Essentially Swiss Re are talking about the creation of better, more accurate and reliable models for longevity risk prediction. The report presents a suggestion of the basic building blocks for a disease centered model and calls for experts to work together towards a better understanding of potential future developments in human longevity.

The report also recommends that pension plans assess the longevity risk associated with members of their schemes and decide whether to hold onto that risk or transfer it to someone else, such as an insurer or to the capital markets, who may be better equipped to deal with the risks. They also say that insurers and reinsurers need to work together to develop robust longevity risk solutions.

“An improved approach to assessing future longevity is one of the essential components in creating an overall solution to the financial effects of ageing societies. It is only through public and private bodies working together that the wider issue of a sustainable infrastructure for long-term retirement provision can be created. Reinsurers with appropriate capacity, who invest in longevity research and development, can play an important role in helping defined benefit pension funds and insurers manage their longevity risk,” said Alison Martin, Swiss Re’s head of life and health products.

You can download the full report ‘A window into the future: Understanding and predicting longevity‘ in PDF format.

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