Choosing Population Projections for Public Policy

Wednesday October 29th, 2008

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Welcome address

Christian MumenthalerHead 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 Mumenthaler29 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 Mumenthaler29 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 Mumenthaler29 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

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

65 70 75 80 85 90

Proportion of mortality by cause

Five-year age bands

Digestive

Christian Mumenthaler29 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

TimelinessThe recent move by the ONS to reporting deaths as they are registered reduces reporting lag

GovernanceAn independent agent with an explicit mandate to calculate and maintain indices is essential

Annually

Quarterly

Weekly

Aggregate total deaths

Aggregate age-grouped deaths

Aggregateindividual-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 Mumenthaler29 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 riskChristian Mumenthaler

29 October 2008

The State of Knowledge on Mortality and Healthy Life

Expectancy

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