Why Teachers Terrify Annuity Issuers

For financial professionals who are new to selling annuities, one of the most sobering things to learn may be that, from the perspective of any company promising to pay a customer a lifetime stream of income, a long life is a risk, not a blessing.

Of course, the people who work for issuers want the annuity holders to live long, happy lives. Life insurance company executives boast proudly of their industry’s role in helping millions of people enjoy their later years.

Annuity issuers can compensate for the effects of longevity risk by selling life insurance policies and other products that do better when the insureds live longer, and by sharing risk with reinsurers.

But, all other things being equal, issuers of lifetime annuities tend to pay out more cash when the annuitants live longer.

Members of the Mortality & Longevity Strategic Research team at the Society of Actuaries (SOA) recently prepared a short guide to help life insurers, government policymakers and others understand how average life expectancy differs for different populations.

The idea behind the guide is that pension plan managers and life insurers can’t simply use each other’s life expectancy tables, or life expectancy tables based on data from entities such as the U.S. Social Security Administration or the U.S. Centers for Disease Control and Prevention. The tables might look similar to lay people, but the life expectancy tables for the general U.S. population are much different than the equivalent tables for U.S. pension plan members, or for the U.S. residents insured by private life insurance policies.

The SOA team illustrated that point by providing a striking statistic: life expectancy at age 65 for many different types of U.S. population subsets, based on data from a wide variety of U.S. government and SOA sources.

Life expectancies vary because of factors such as how healthy various groups of people are, and why they ended up with arrangements such as life insurance, or pensions.

For a look at how 7 types of population subsets rank, listed from the subset with the shortest life expectancy at age 65 to the subset with the longest life expectancy at age 65, see the data cards in the slideshow above. (Wiggle your pointer over the first slide to make the control arrows show up.)