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IIS 44th Annual Seminar The Life Insurance Market’s Response to Aging: Mega or Mini ?

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 ( gferro@uade.edu.ar ) Taipei (Taiwan), July 16th, 2008. Introduction. Aging implies more savings for retirement, worldwide

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IIS 44th Annual Seminar The Life Insurance Market’s Response to Aging: Mega or Mini ?

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  1. IIS 44th Annual SeminarThe Life Insurance Market’s Response to Aging: Mega or Mini? Gustavo Ferro Universidad Argentina de la Empresa (UADE) and CONICET (gferro@uade.edu.ar) 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 90 85 80 World: 75.1 82.1 75 75.6 74.0 70 World: 65.4 65 63.4 60 55 2000-2005 Forecast 2045-2050 More developed regions Less developed regions Source: Jousten (2007) on World Population Prospects: The 2004 Revision Highlights, United Nations 2005

  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 MWR on nominal (immediate single payment) annuities – Male, 65 MWR using public bond rate MWR using corporate bond rate Australia Canada US UK Switzerland General population Annuitant population 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) Third Tier Second Tier Annuitization by an “Annuiplus” purchase Phased Withdrawalin sub accounts (“Lockboxes”) First Tier Allowed Lump-Sum Decumulation Voluntary Mandatory

  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 sumat 65 ($15,000) Death insurance at 65 ($10,000) Immediate annuity, from 65 ($9,562 p.a.) Lump sum + Deferred Annuiquest Total cost Lump sumat 65 ($15,000) Death insurance at 65 ($10,000 p.a.) Deferred annuity, from 70 ($9,562 p.a.) Phased withdrawal Costs in thousands US$ 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

  14. Thank you for your attention gferro@uade.edu.ar

  15. Appendix 1: Aging

  16. Appendix 2: Money Worth Ratios

  17. Appendix 3: An hypothetical example

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