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January 06, 2008 at 02:00 PM
Meeting the demand for ways to manage longevity will continue to be both the challenge and the opportunity for reinsurers throughout 2008, say industry executives.
Reinsurers are starting to get a handle on the risk associated with longevity products, and boomers are starting to realize that they may need such products going forward, but interviews suggest the shift is just starting to transition from its fledgling stages.
Over 500 living benefits products are currently available from the life insurance industry, noted Chris Raham, a senior actuarial advisor with Ernst & Young LLP, during a recent conference sponsored by National Underwriter.
During the discussion on retirement income, Raham said that for a long time life insurers have outsourced mortality risk to reinsurers who were good at predicting mortality up to retirement age but less comfortable with it at ages over 65.
Conversely, he said in describing this transition period that retirement planning is facing, many consumers are just starting to consider ways to ensure regular income in retirement. To make his point, Raham asked the audience of senior executives how many had purchased a variable annuity with a living benefit. No hands were raised. However, when attendees were asked whether they had investment products as part of their retirement planning, at least half the room raised their hands.
Reinsurers contacted described how their efforts to meet longevity needs were developing.
Reinsurers are now better able to understand longevity risk than they have in the past, says Donna Kinnaird, president of Swiss Re Life & Health America, Armonk, N.Y. While there has been a lot of mortality data, there has not been a lot of longevity data, she explains. In order for prudent decisions to be made, both data as well as actuarial opinion are needed, adds Kinnaird.
There are 2 ways to meet the longevity challenge, through counterparty risk and by hedging, says Kinnaird, and each has its own challenges. There are a number of steps that need to be established to facilitate counterparty arrangements, she explains. They include establishing a reference price for longevity risk, developing a longevity index, and then creating counterparty agreements. But, synthetic hedging can also be a viable alternative, she adds.
As the industry is getting better at assessing such risks and turning to the capital markets, there will be a greater use of both reinsurance and securitizations, she says.
However, Kinnaird says she is not sure if ultimately one longevity product can be developed for all longevity needs. The reason, she explains, is that senor citizens need to understand what they are buying and in order to maintain transparency, products cannot be too difficult to understand.
