Longevity
"As people 'live the extra mile', we need to continuously pioneer ways to protect against the twists and turns of living longer."
In this interview, Cord-Roland Rinke, Managing Director Life & Health – Analytics and Longevity, discusses the intricate dynamics of increased life expectancy and its profound impact on our industry. He delves into evolving trends, the key factors that have propelled life expectancy and innovative product designs and risk management strategies to navigate this complex and challenging terrain.
Let's start by exploring what longevity is. How would you define it, and why is it significant for individuals?
Longevity refers to an extended lifetime. While outliving the average lifespan of one’s own generation is of course very fortunate, it also requires additional financial resources to support a longer life and maintain one’s standard of living throughout the extended retirement years. Uncertainty about the length of life leads to uncertainty about the required funding. A person who lives to 95 instead of 85 may need to fund their retirement for 30 years instead of 20; this is a significant difference. In many countries, life insurance companies, pension funds or the state play a crucial role in providing financial security throughout retirement. They fund retirement and ensure that individuals receive adequate support even if they live longer than expected. In our industry we refer to this uncertainty as 'longevity risk'.
How does longevity risk specifically affect carriers?
By pooling the longevity risks of many individuals, carriers spread the financial impact of individual life expectancies – some living longer than expected, others shorter – across a broader base. Despite the positive effects of pooling, longevity risk has a significant impact on insurance companies and pension funds, requiring careful risk management. With increasing life expectancies, and despite pooling, these institutions face the challenge of ensuring that they have adequate resources to cover extended periods of retirement benefits. While the trend of increasing life expectancies, resulting in a rise in the average lifetime, is positive news for annuitants and pensioners, the insurance companies and pension funds that fund these longer lives, must contend with uncertainty surrounding life expectancy and higher costs. This uncertainty underscores the importance of adopting effective approaches to navigating this complex landscape.
So, how can longevity risk be managed effectively?
Similar to other risks, effectively managing longevity risk requires a systematic approach. Initially, it's crucial to accurately measure the risk, typically through scenarios that evaluate potential monetary losses, such as the advent of a medical breakthrough like a cure for cancer. Other methods use multiple scenarios. To gain a comprehensive understanding of overall exposure, longevity risk should be assessed across the entirety of the business, including different segments like younger versus older lives or mortality versus longevity covers. This assessment should also consider how longevity risk interacts with and impacts other risks held by the company. A common strategy in managing longevity risk involves transferring a portion of it to a reinsurer. This is often achieved through a standard reinsurance structure like the regular premium annuity treaty, where carriers pay premiums based on expected annuity payments to reinsurers. In return, the reinsurer assumes the responsibility of paying the actual annuities. This arrangement, also known as a longevity swap, enables insurers to exchange uncertain annuity payments for fixed premiums, thereby enhancing the stability of their financial obligations.
Leading our Life & Health – Analytics and Longevity division in Hannover, Cord's tenure spans over 30 years.
Together with a strong team, Cord has driven the growth of Hannover Re's longevity business over the past two decades. He holds a degree in mathematics and is a qualified actuary.
"While the trend of increasing life expectancies, resulting in a rise in the average lifetime, is positive news for annuitants and pensioners, the insurance companies and pension funds that fund these longer lives, must contend with uncertainty surrounding life expectancy and higher costs."
To what extent is cooperation a key factor in managing longevity risk?
Securing income for life is a complex task, that requires effective collaboration between different professions and parties to achieve optimal outcomes. Within the context of managing a single pension, it is remarkable to observe how different professionals, including accountants, actuaries, data scientists, underwriters and legal experts, each contribute to their specific role: ensuring timely payouts, managing administrative tasks, overseeing asset management and managing longevity risk. Reinsurers play a key role in this collaborative framework by consolidating many diverse risks from different geographical areas. This approach allows them to diversify risks to effectively mitigate longevity risks. Working with a global reinsurer offers additional benefits, such as access to comprehensive data insights and specialised longevity expertise, enabling more informed decision-making and strategic planning.
Are there any innovative solutions designed specifically to address longevity risk?
Absolutely. As people 'live the extra mile', we need to continuously pioneer ways to protect against the twists and turns of living longer. At Hannover Re, our commitment to longevity innovation actually goes back decades, and we have continued to evolve. While traditional guaranteed annuities with fixed payouts have been a staple, these offerings have been greatly expanded. Today, there are options such as spousal benefits, income indexation to combat inflation, enhanced annuities for those with impaired health or in need of care, death benefits, reversionary annuities, deferral periods and investment-linked annuities. These enhancements and variations often require the development of new reinsurance structures and a strong commitment from reinsurers to take on the associated risks. At the heart of our approach is close collaboration with our clients and a commitment to innovation to meet evolving needs.
When it comes to annuities, aren't investment returns more important than longevity risk?
That’s a question that’s asked a lot, both by consumers who view annuities as an investment focused on returns and by companies considering whether to offer annuities. Of course, an annuity is a financial product where an individual pays a lump sum or makes periodic payments in exchange for a regular income in retirement, so the returns generated by investing the funds received from annuity holders are indeed important, especially in the early years when mortality rates are low. However, as annuitants age and mortality rates rise, longevity risk and the potential need to sustain annuity payments for longer than expected becomes more pronounced. To address this effectively, it's essential to separate longevity risk from investment risk. Reinsurance solutions are available that allow insurers to manage these risks separately, enabling more robust overall outcomes.
Data analytics and technology play an increasingly important role in our industry. How do they contribute to understanding and managing longevity risk?
The key event in studying longevity risk is usually the death of an elderly person. Because mortality is more common at older ages than at younger ages, this event is relatively frequent and allows for more reliable statistical conclusions to be drawn. Actuaries have identified several factors that influence mortality, such as age and sex, which are obvious, and benefit levels, socio-economic status, retirement age and other factors, which are less so. Collecting experience data, researching the factors that affect a particular business or product, and separating correlation from causation are all very valuable in avoiding surprises. Analysing past mortality trends to estimate future trends, often referred to as mortality improvements, is another contribution of data analytics. Together with advanced technology, these insights enhance the understanding of longevity risk and aid in developing effective solutions.
Working with colleagues around the world is a source of motivation for Cord, who finds fulfilment in helping insurance companies and pension schemes provide financial security for retirees.
Outside of his role, Cord enjoys spending time with family and friends and is always keen to learn new things.
"Securing income for life is a complex task, that requires effective collaboration between different professions and parties to achieve optimal outcomes."
What are the key factors contributing to the steady increase in life expectancy?
It’s one of the great achievements of recent decades that everyone can expect to live longer than previous generations. A variety of factors have contributed to the increase in life expectancy. Medical advances, behavioural changes and environmental improvements have all played their part. The discovery of antibiotics, the introduction of vaccinations and advances in the treatment of heart diseases have been important. Better hygiene, smoking cessation, access to and preservation of nutritious food, workplace safety and screening programmes are other factors. The value we place on life has led humanity to invest considerable resources in understanding the drivers of health and longevity. Essentially, science and education have been, and continue to be, the key drivers.
Looking ahead, what do you foresee as the future impact of longevity on our industry?
As populations are ageing around the world – the African continent being a notable exception – the proportion of people in retirement is increasing. This demographic shift requires our industry to address the diverse needs of retiring or retired consumers. There is a clear need to develop new products that incorporate longevity risk in different forms. Different societies have different needs for insurance cover that may or may not include payout guarantees, and for cover that allocates asset risk and return differently. Our industry needs to address these different needs, requirements, products and longevity risks. Moreover, once the longevity risk is covered, asset management can concentrate on maximising investment returns without being unduly burdened by unexpected liquidity needs arising from extended life expectancy.
Finally, what advice do you have for insurers as they adapt to the changing landscape of longevity?
Supported by a slowdown in the mortality improvement trend and the impact of the Covid-19 pandemic, longevity has proven to be a very profitable risk in recent years. However, longevity risk is inherently a long-term risk, and the pandemic has shown how difficult it is to forecast mortality even over short periods of time. While many countries have recently experienced limited or no improvement in mortality, the future outlook may be very different. It is impossible to predict longevity and the risk will materialise over a long feedback cycle. Our industry must therefore continually monitor and adapt to demographic changes. This approach is essential not only to meet the challenges and effectively manage the associated risks, but also to take advantage of the opportunities that arise. By doing so, carriers can provide solutions that support the financial security and peace of mind of tomorrow's retirees.
Thank you for this insightful interview. Longevity reinsurance truly sounds like an exciting field to work in ...
It really is! When I started my career in reinsurance, longevity risk was considered a risk a reinsurer should never touch, and it was always argued that the mortality trend would always work against reinsurers taking on longevity risk. Today, the situation is reversed: almost every major reinsurer offers longevity risk protection, and the focus is on the opportunities and benefits rather than the risks. It's a point of pride that Hannover Re has been a driving force in this development, pioneering the field in many areas and today being recognised by our clients as a trusted partner with an excellent reputation, not only in established markets but also as we expand our longevity expertise into new territories.
Cord-Roland Rinke Managing Director Life & Health – Analytics and Longevity Tel.: +49 511 5604-1658 Mail: cord-roland.rinke@hannover-re.com
Longevity Solutions
Uncover innovative products for end-consumers and effective solutions to optimise your longevity risk exposure:
ReCent Perspectives
For more expert insights, explore previous editions of our ReCent Perspectives newsletter:
Notification Service
To get notified when a new edition of our ReCent newsletters is available, subscribe here:
RePlay by Hannover Re coming soon
Listen up: We will be launching our very own Life & Health podcast “RePlay by Hannover Re” this September. In 15-minute-long interviews Hannover Re’s experts will explore trends, share insights, and discuss innovative solutions that are shaping the Life & Health insurance industry.
For a sneak peek, check out our trailer and be sure to subscribe on your favourite podcast platform.
Subscribe now
If you need further information or would like to send us feedback, please feel free to get in touch.
* The information provided in this document does in no way whatsoever constitute legal, accounting, tax or other professional advice. While Hannover Rück SE has endeavoured to include in this document information it believes to be reliable, complete and up-to-date, the company does not make any representation or warranty, express or implied, as to the accuracy, completeness or updated status of such information. Therefore, in no case whatsoever will Hannover Rück SE and its affiliated companies or directors, officers or employees be liable to anyone for any decision made or action taken in conjunction with the information in this document or for any related damages.
Hannover Rück SE © 2024