September 1, 2011 / 3:47 PM / 8 years ago

Better mortality modeling needed to assess longevity

LONDON (Reuters) - Unreliable forecasting tools used to predict future life expectancy has resulted in pension funds under reserving for longevity risk, leading to additional and unexpected liabilities, said Swiss Re in a report on Thursday.

Elderly people listen to a tour guide in a church in central London, November 29, 2005. REUTERS/Toby Melville

The world’s second biggest reinsurer called for reinsurers to work with governments and employers to share the burden of longevity risk. It also urged the development of a forward-looking mortality model, which would use scenarios based on social factors, medical treatments and preventative approaches that influence disease.

“Holding longevity risk continues to be a major challenge for pension funds, insurers and governments and better methods need to be developed to share the risk appropriately,” Swiss Re said in the report.

The failure to consider future drivers of mortality in historical predictions has “contributed to employer pension funds under reserving for longevity risk and other bodies, including governments, not budgeting effectively for funding an aging population”, said Daniel Ryan, head of life and health research and development at Swiss Re.

The report calls on medical experts, actuaries and demographers to work together toward a greater understanding of potential future developments in human longevity.

Risk assessor firm RMS said in July the reinsurance industry would get better at hedging longevity by developing better indices.

Pension funds and reinsurers all need to agree on pricing mortality improvements, get comfortable with basis risk on standardized indices and the longer term nature of longevity bonds, said Peter Nakada, managing director at RiskMarkets at RMS said in a seminar in London in July.

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Pension plans should assess their exposure to longevity risk and decide whether to pass it on to a third party, said the report.

“Reinsurers with appropriate capacity, who invest in longevity research and development, can play an important role in helping defined benefit pension funds and insurers manage their longevity risk,” Alison Martin, Swiss Re’s head of life and health products, said.

In December 2010, Swiss Re launched a series of longevity-based ILS notes, the first time the risk of people living longer than expected has been securitized in catastrophe bond form. Special purpose vehicle Kortis Capital Ltd is an eight-year bond, which will pass Swiss Re’s longevity risk direct to capital markets investors.

Only a handful of longevity swaps have been formatted to work for a pension scheme in Britain — around 8 billion pounds in the past five years, according to Pension Insurance Corporation.

The biggest so far involved German car maker BMW last December offloading 3 billion pounds of risk from its British pension scheme to Deutsche Bank’s insurance subsidiary Abbey Life.

To see the full report from Swiss Re, click see here

Reporting by Sarah Mortimer

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