Both governments and employers are increasingly shifting longevity and market/savings risks to individuals, for example, through reduced public pension schemes and the transition from defined-benefit to defined-contribution schemes in corporate retirement plans, said The Geneva Association, the leading international insurance think tank for strategically important insurance and risk management issues.
According to its “Understanding and Addressing Global Insurance Protection Gaps” report:
This trend has widened pension protection gaps. Some estimates put the global pension savings gap at more than US$100 trillion, about 1.5 times the world’s GDP.
Ultimately, such gaps can impose a severe additional financial burden on society as the number of individuals who outlive their assets and are thrown into poverty will probably increase.
Against this backdrop, the commercial potential for life insurers is as vast as their responsibility vis-à-vis society to make a meaningful contribution to risk mitigation and live up to insurers’ claimed relevance.
Innovative approaches needed
The insurance industry needs to explore innovative approaches to developing a more effective proposition for the challenge of the rising longevity risk facing society.
A starting point would be to offer individuals easier access to simpler products with lower fees, for example deferred annuities that must annuitise at a certain age, as opposed to existing complex annuities with guaranteed withdrawal benefits or guaranteed income benefits, products that may not be affordable to the lower income segments of society.
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In addition, the insurance industry, in conjunction with trade groups, associations and educators, could play a significantly bigger role in designing and delivering financial literacy education.
However, public and private-sector decision-makers need to bear in mind that longevity risk has two components—the ‘individual’ and the ‘aggregate’.
Individual longevity risk arises because it is impossible to know when a particular individual will die. Individual longevity risk can be managed through risk pooling, which is performed by the government, pension funds and/or insurers that sell annuities.
Aggregate longevity risk, on the other hand, reflects the uncertainty of how long an entire population cohort will live. Historically, experts have consistently underestimated life expectancy.
This systematic component of longevity risk cannot be mitigated through diversification by age groups or geography as certain mortality improvements due to medical breakthroughs, for example, will affect the entire population. Aggregate longevity risk is substantial and therefore a concern for the future of all pension systems.
Requires both the public and private sector
Therefore, policy recommendations go beyond the insurance industry: closing the pension gap requires the involvement of both the public and the private sector.
The current parameters and conditions surrounding pension systems such as retirement age, mandatory contribution rates, investment restrictions, the degree of competitiveness for pension fund administrators, incentives to save voluntarily and the degree of economic informality can all be adjusted in order to close the pension gap.
Life insurance products, long-term savings plans and annuities offered by the insurance industry can also be embedded in pension systems to protect individuals against mortality and longevity risks and to complement existing pension schemes.
The full report is available here.
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