Choosing Population Projections for Public Policy

1. Choosing Population Projections for Public Policy Wednesday October 29th, 2008 Kindly Supported By:

2. Welcome address Christian MumenthalerHead of Life & Health ILC-UK & the Actuarial Professions conference on Choosing Population Projections for Public Policy 29 October 2008

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 Old-age dependency ratios are sharply on the increase ~GBP 1 000bn Age distribution, Europe 1950 – 2050 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 ~GBP 10bn 2008 * Source: Pension Buyouts 2008, Lane Clark & Peacock

4. Catalysts for risk transfer • Well-understood and widely-accepted risk models • Credible, timely and consistent data • Motivated buyers and sellers Christian Mumenthaler 29 October 2008

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 Mumenthaler 29 October 2008

6. Capital markets favour credible, cause-based stochastic projections Actuarially- adjusted historic projections Inter-disciplinary cause-based projections Actuarial subjective projections Stochastic modelling Maturity of development Longevity modelling Natural perils modelling Christian Mumenthaler 29 October 2008

7. Research should focus on cause-based mortality Proportion of mortality by cause Heart disease Cancer – lung Cancer – other Parkinson’s, Alzheimer’s, dementia Pneumonia External respiratory Chronic obstructive pulmonary disease Stroke Other External Digestive Source: Office for National Statistics Twentieth Century Mortality Files Christian Mumenthaler 29 October 2008 Five-year age bands

8. Aggregate total deaths Aggregate age-grouped deaths Aggregateindividual-age deaths Geographical age-grouped deaths Causal age-grouped deaths Annually Quarterly Weekly 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 Available in the UK Not available Timeliness is key in data collection for parametric Eurowind bonds

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 Mumenthaler 29 October 2008

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 risk Christian Mumenthaler 29 October 2008

11. The State of Knowledge on Mortality and Healthy Life ExpectancyKindly Sponsored by: